Been Down So Long (It looks like up to me)

Markets are making 4 and 5 year highs. The noise out of the talking heads has been anything but bearish. Those who listen to all the cheering on the financial channels may be wondering why they are not feeling like their holdings are making new highs. Their statements certainly do not look like the result of a stellar 5 year Bull market run.

Understanding the route we took to get here explains some of it. Over 5 years, this has been a painful round trip, with the market crash continuing to make new lows into October 2002. We nearly revisited those pre-War lows March 2003. Indeed, the bulk of the market gains have come in one year in five: 2003. If you bought equities prior to the war’s start, you were richly rewarded for your risk taking. Meanwhile, longer term “Buy & Hold” investors have suffered lots of agita with very little to show for their troubles.

Looking at the actual numbers reveals why. Going back to the data, we see that the S&P500 was at 1,143 five years ago; It closed at 1,307 Friday. The Nasdaq was at 1,857 five years ago; Yesterday’s close was 2306. The most recent Dow close was 11,280 versus 9,721 five years ago.

Those numbers are annual returns of 2.72% for the SPX, 4.43%, on the Nasdaq, and the Dow generated annual returns of 3.02%. As the nearby chart reveals, this is hardly world beating performance. The exception to this has been the small cap issues; in particular, the strong Russell 2000. After years of under performance, the smaller issues have returned with a vengeance, mean-reverting to annual returns of nearly 11%. That’s about the S&P’s average. One has to wonder, however, when the pendulum will eventually swing back towards the larger cap. (We also note that others have incorrectly predicted this for 5 years running).

Today, Momentum is driving the market, with fundamentals taking a back seat to ever shorter term trading. Long-only managers are starting to get criticized for conservatism, while the shorts have been chased out of town. Liquidity abounds; M&A activity has reached frenzied levels, with plentiful private equity cash driving deals. Today’s WSJ discusses pre-emptive financing – venture capitalists throwing money at risky, untested start-ups. There is hidden leverage behind derivatives and many hedge funds. The Bears have been sent scampering into the woods to lick their wounds and do what it is that bears do in the woods.

Which brings us to this week’s market call:  We are hard pressed to find much company as Bears for 2nd half 2006. And we are impressed with how quickly our short term Bullish targets from last week have nearly been achieved: We continue to see those marks – Dow 11,350, SPX, 1,335, and NDX 1,795 – as the upper range of this move, and reiterate our call for cautiousness.

We suspect this market is in the process of topping, as early as this week.

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  1. Get Long Vega commented on Mar 21

    Risk / reward: +4.7% risk-free for three months or muscle-up and buy the Qs / SPOOs? Benny Ben saying last night he’ll keep raising rates till the cows come home? Yet the HELOC lovefeast is winding down b/c housing is finally D.O.A.?

    Barry, I’m with you, there’s much too much risk being long stocks here than the potential payoff merits. Odd-Lot Robert is over-his-head long, Cramer is insane, and mutual fund cash posy’s are at cycle lows? BOO-YAH JIMMY, COME TO OUR TOWN NEXT! And yeah, I know Bird Flu is out there and the wackos say it’s bad and that I should be worried. ‘Ahhhhh, Dr. KOSPI, let me introduce you to my new friends, Mr. and Mrs. SARS.’

  2. rob commented on Mar 21

    i find it interesting that the current strength in the DOW began on Mar. 8, the day of the NYX IPO. the current rally should hold until the seat holders can unload NYX shares.

  3. scorpio commented on Mar 21

    “lick their wounds and do what bears do in the woods”. that’s a good one. you’re getting better all the time.

  4. At These Levels commented on Mar 21

    How Long is the Long-Term?

    I get really annoyed when I read this (such garbage appears regularly in the press), written by people that clearly don’t know what they are talking about. To understand why the rise in blood pressure, read this, by people who do.

  5. jim commented on Mar 21

    I guess every little dip is a buying opportunity.

  6. Cullen commented on Mar 21

    I haven’t seen such unadulterated greed in a very long time. It doesn’t bring back good memories.

    No bad news is good news for the market I guess. That is of course until some bad news hits the wires and then bad news will be likely to turn into very bad news.

    This reminds me a bit of the Presidential elections 18 months ago. The market trended higher on no news until the election and then sputtered on a typical “buy the rumor, sell the news” trade after Bush was elected. This looks the same. The market will likely remain healthy until the “news” (Fed stops) hits and then a nasty sell-off should occur when investors look at eachother dumbfounded at the fact that they have no “rumor” to buy.

  7. Bynocerus commented on Mar 21

    As I write this (12:18 EST), the NASDAQ is at all time highs, but the new highs stand at only 3.5% and the A/D Line is positive by less than 300. One would think that after a 30 point reversal to all time highs breadth would be much, much better, but one would be dead wrong.

    Can anyone say maximum overbought?

  8. B commented on Mar 21

    There are short term traders, day traders, midterm traders and long term traders. Short term traders need volatility. Today was “semi” telegraphed as the semis hit an NR7 almost guaranteeing it would be up. That launched the last semi up move as well. Buy programs came in or heavy money of some sorts and drove the NYSE from -1300 on the AD to +100. Ditto on the Naz. I don’t have the stats but that is a once or twice a quarter deal where such a significant reversal takes place. Markets never go straight down. Even in the bubble the same rules worked.

    This is a trader’s day. They need to make money too. I’m sure they’d like to jam it up and fill that big ole gap on the semis within the next few days. Let’s see. Breadth totally sucks.

  9. anna commented on Mar 21

    My guess is the numbers will go somewhat higher than your predictios because irrationality seems to always exceed expectations. Using a bad analogy, short term behaviors are chaotic, like predicting the weather a week or 2 in advance. But patterns are seasonal, it will get hot(ter) it will get cool. while there may be some rational factors to explain some of stocks increases above historical values (better knowledge of long term gain, averaging through mutual funds) they don’t explain the current valuations, plus at some point there need to be corrections of various inflating factors.

    Assuming there is a benovelent goddess these will start bashing us about as Republicans really commit themselves to the “economic miracle” for the next election. However an old testament god will keep things superficially nice until the Republicans are reelected and then let us stew in the consequences.

  10. Mark commented on Mar 21


    So, on those numbers (3.5% new highs) one could be quite long in the sector and be down on the day. Isn’t that just the formula spelled out for tops by Paul Desmond?

  11. jim commented on Mar 21

    Rally sputtering?? Goldman may have to kick in another buy program. To rescue the last one.

  12. Bynocerus commented on Mar 21



    Speaking of which, can you believe Teenage Mutant Ninja Turtles are still around? And as popular as ever. One of my wife’s 2nd graders was so excited about them the other day. WTF? I thought those things came out in the ’80’s.

    In relation to Jim’s post, looks like the Volkswagon guy decided to “unpimp ze rally.” Although, I suspect we’ll get a nice squeeze at the end of the day, providing a nicer short entry point.

  13. Jordan commented on Mar 21

    The markets rise is nothing more than inflation. The amount of liquidity that is being pumped into the system is pushing the market up in nominal terms. In real terms the market is falling.

  14. Lord commented on Mar 21

    Bullish, yes, but I am waiting for absolute giddiness.

  15. Barry commented on Mar 21

    Man, that 42 level is a killer for the Q’s. Time and again. No higher high on any rally. The market tries to retest on the high side and if unsuccessful will retest on the low side. We are likely going down from the high today to retest the low side of the Q range.

    Is this the last hurrah? I’m getting tired of saying that but we really haven’t done sh*t since November sans Industrials, brokers and commodities. All look to have finally given sell signals on the weeklies.

  16. pete Preissle commented on Mar 21


    “We suspect this market is in the process of topping, as early as this week.”

    Hmm. Sounds as if you might have what we used to call in the olden days a “case of the nerves.”

  17. Mark commented on Mar 21


    I haven’t followed the Industrial or brokers but I am in full agreement on the commodities. They look to have rolled over also. Watch gold even give the Silver Crazies (the new ETF is here!) fits as it pulls all the metals down with it.

  18. hbt commented on Mar 21

    Bearish (possibly very) catalyst today:

    the market went down & will con’t to go down because of the pitiful, pitiful answer Pres.Bush gave Helen Thomas today on the IRAQ war; paraphrasing:
    she asked, since every reason you have given Americans for going to war in IRAQ has turned out to not be true, then… Why did we go to war against Iraq ?”
    ..his answer was disjointed to the point that he confused Iraq w/ Afghanistan and righted himself only to admit a moment later that the war would not be “finished” in his presidency….DFX should con’t its (dubious, or unfortunate) leadership… as that tape makes its way around the world- where Bush is & has been hated by all the financial centers…. those at that proverbial margin (“where prices are made and trends begin”) … will at the least, sell the $USD & at the most just take profits in all of their markets (see Barry’s post about world returns) … as a measure of “protection” against the total impotence of the leader with WAY too many nukes at his disposal….
    I don’t think most Americans appreciate how much Bush & the Neo-Cons have hurt the US investment returns…. no matter, if you are a japanese-based investor & just had your best year in a decade, your financial yr end is in 9 days, and thus, seeing Bush “fail” on world-wide TV like that means that he has three more years to call “do-over” and bomb Iran & maybe slip-one in-on NorthKorea- here in Texas – like to show ’em how its done !…… welll…uh.. you & everyone will take your end of Q/yr returns and go “re-access” what it means for the financial world that a lame BUsh is moping around the White House, muttering over & over, “buh… buh… you sead it wuz a slam dunk on him havin’ them newkular bombs ….!!!! ”
    (I am definitely no donkey-eyed-democrat… but enough is enough )

  19. B commented on Jun 2

    Richard Farina is spinning in his grave.

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