Ritholtz: This Rally Isn't Over Yet

Includes: DIA, QQQ, SPY
by: Market Blog

Barry Ritholtz at The Big Picture outlines why this rally has legs, even after the S&P 500 has risen about 60% from its lows in March. He has four points:

1. Historically, secular bear markets, during which stocks generally decline over the longer term but see bullish rallies here and there, get massively oversold, then see a huge bounce. He provides these numbers: On average, a rebound rally following a severe bear market lasts 17 months and sees stocks rise an average of 70%. In other words, we’re not at the end of this rally yet.

2. In Mr. Ritholtz’s words, this is the most hated rally in Wall Street history, with professional and individual investors giving all sorts of reasons why it will end badly. “Most bull moves do not end when they are hated, they come to a halt and reverse when they become over-owned and over-loved,” he said. “We are not there yet.”

3. The U.S. dollar is weak. He doesn’t expand on this point, but we think he’s referring to the fact that the majority of sales for companies in the S&P 500 are derived from overseas markets. A weak dollar should drive earnings higher.

4. The stock market’s recovery from its lows in March has not been in anticipation of a V-shaped economic recovery (marked by strong growth and good times) or improvements in earnings. Rather, the recovery so far is simply a reversion to the mean as “the aberrational credit panic selloff gets unwound.”

In other words, the market is reflecting a more typical recessionary selloff now that investors no longer fear that the global economy and financial system are in ruins.