Cherry Blossoms and Bear Market Rallies

Includes: DIA, QQQ, SPY
by: Mike Goodson, CFA

Anyone who has seen the cherry trees in the Washington DC area (or Japan) alive with their blazing pink blossoms will attest to their startling beauty. The cherry blossom, or sakura in Japanese, has long been an important symbol of the traditional samurai spirit. The samurai was the warrior class of feudal Japan and even today its dramatic stories of honor, heroism and loyalty are deeply woven into the Japanese psyche and self-identity.

So how did a small, fragile and pink flower come to be the symbol of this ferocious fighting class? As any botanist could tell you, the cherry blossom has a very short blooming time. One day as Spring begins we see the cherry trees as dark and bare as they have been all winter. Then, bam! All of a sudden, the trees are wrapped in a dense blanket of the pretty pink flowers. Then, just as quickly as they came, they are gone. Their extreme beauty and quick death have become associated with human mortality and more specifically with the life of the samurai -- beautiful in battle, but ultimately dying young.

So much like the sakura are bear market rallies. Beautiful, because we all welcome the reprieve from the fear and panic associated with stock prices moving lower and perhaps this time, we collectively hope, we will see the big turn and the end of the bear market; and quick to die, because yet again the fundamentals that brought us to the bear market have not gone away.

The current debate among investors centers on the nature of the current rally. Is it the end of the bear market rally? Although I have not tried to quantify the breakdown of sentiment, it seems that once the market held the previous lows set in January, the majority of commentary supported the notion the market might have made a big turn. Now as the rally appears to be stalling, I am seeing more and more reports calling the big turn into question.

Please refer here to read Paul Castro's latest blog on why he thinks the bearmarket will persist.

I agree with him. Sentiment can change quickly but fundamentals take a little longer. I suspect that investors with a 3-year investment horizon would be happy to have been buying stocks at this level. Investors with a shorter time-frame might be rewarded for waiting a bit.

One very easy way to assess the market is simply looking at its peaks and valleys. Since the October 2007 high, I count seven peaks (again using SPY as my "market" proxy), each one lower than the previous one. This is a classic bear market formation. The valleys tell a similar tale. My count is six troughs since the October peak, again with each one lower than the one before. Although the low which occurred on March 17 was marginally higher than the low established earlier in the month, I continue to believe that until we get a higher high, this may just be some kind of head fake.

Please refer to my private blog for the actions I am currently taking to make money in this challenging environment.

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