Is what we’re seeing the start of a second leg up in an ongoing bull market or merely a bull-trap, a bear market rally? And if this is the start of a second leg up, just what might one expect? The honest answer, of course, is that nobody really knows. Yet if we take a look back at some past markets we can at least consider the different possibilities and variables that might come into play.
Of the first and second leg rallies that followed the seven bear markets which can be said to be in the same “league” as the severe 2007-2009 decline, only once did the second leg surpass the first in terms of percentage gained. That occurred following the mother of all bear markets, the 1929-32 bear; otherwise, if the second leg ran half as far you were lucky.
If we exclude those extraordinary rallies that followed the 1929-32 bear, the average first run after a severe drop is 62%, followed by a correction of around 19% before resuming to the upside for another 25%. Well, the Nasdaq has put in an impressive 81% first leg move (second only to the 101% first leg following the 29-32 bear), corrected 19% and has so far rallied a little under 12% as of Wednesday’s close.
As I said, whether or not this is the beginning of a second run higher or a mere snap-back rally remains to be seen. While it’s prudent to brush up on how past markets have behaved in similar environments, ultimately keeping things simple will serve you best. This starts with ignoring any and all financial shows on television and about 99% of the articles written about the economy online and in newspapers. Focusing on what the market is actually doing on a day to day basis will eventually provide the answer to the question of this commentary. Then the question will be: Were you paying attention?
Excerpt from my trading journal, August 4, 2010:
AFK (thin but cup forming)
EWP/EWI (doesn’t look like spain/Italy are headed for hell)
EWT (big seven and a half month double bottom)
EWU (another cup-shaped base that, having undercut its previous base, now counts as base #1)
TAO (recent action suggesting that the death of Chinese real estate has been greatly exaggerated)
THD (buying thailand both times it bounced off the 200dma would have been very profitable as the ETF is now hitting new highs on big volume)
IDX looking decent
Energy, Materials & Commodities
If Copper does indeed have a Ph.D in economics, then its July turn-around could bode well for the current rally. Copper and Copper-Miners ETFs –namely, the painfully thin CU and COPX - did all right last month, racking up gains of over 20% each. Both are forming U- or cup-shaped patterns at the moment.
JJG/DBA (wheat prices rising)
XME & KOL (peaking above 200dma volume – forming cup?)
Some gold stocks (EGO, GOLD) did well today but the metal itself looks like it could be heading back to 200dma, if not lower (NYSEARCA:GLL).
Disclosure: Long: FFIV, VMW, RVBD, PCLN, OPEN, GLL