Have we already enjoyed the Year End Rally?

A NYT column last weekend asked: Have we already enjoyed the Year End Rally? Today’s action makes that query all the more relevant — especially in light  of last week’s Dollar whackage:

Here’s the ubiquitous excerpt:

"THE stock market has had a great run over the last few months, but as the holiday season begins, some analysts are worrying that the traditional year-end rally on Wall Street may have already come and nearly gone.

Mary Ann Bartels, technical research analyst at Merrill Lynch, wondered in a note to investors whether the tendency for stocks to climb in the last couple of months of the year had been rescheduled this year for September and October.

“We think yes,” she wrote. She then acknowleged feeling torn between what her charts have told her and what the calendar and history have led her to expect.

“It is not our favored stance to be more toward the bear camp looking for a cyclical correction of 8 to 10 percent, but all of the market indicators suggest this is the more likely scenario over the coming weeks,” Ms. Bartels said. “What is surprising is that these readings are occurring at this time of year. Most years see a bullish year-end rally.”

She highlighted several exceptions that prove the rule, including three years in the 1990s when the Standard & Poor’s 500-stock index lost at least 6 percent at some point during the last two months of the year. What signs suggest that 2006 will play out as those three years — 1991, 1994 and 1996 — did?

Trading volume has shrunk, something that often precedes a price decline, she noted, and several sentiment indicators, including opinion surveys of investment advisers and measures of market volatility, show the sort of complacency that typically occurs near market tops.

Interesting stuff . . .


UPDATE: November 27, 2006 10:43am

CNBC’s Bob Pisani quotes several unnamed traders who have said that in light of the dollar drop, overseas investors are repatriating some cash, locking in their profits for the year, and eliminating additional currency risk . . . 


This Party May End Before It Starts
NYTimes, November 19, 2006

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What's been said:

Discussions found on the web:
  1. Michael C. commented on Nov 27

    As far as sentiment, the latest AAII shows there are still people fighting this trend. Bulls decreased, while bears increased.

    A few things come to mind…

    1) The fastest and hardest corrections come during bull markets.

    2) It’s not how we open, it’s how we close.

    3) Tops are a process.

    We still have the Fed meeting in another 2 weeks. There will no doubt be another “Fed is done” rally.

    From what levels, we shall see…

  2. JWC commented on Nov 27

    Dow is down 119 as of now… We shall see what the day brings.

  3. lurker commented on Nov 27

    NAZ leading the way down: off 42 or so.

  4. tjofpa commented on Nov 27

    “The FED is done”

    Done with what, jawboning inflation?
    They won’t be done if the $ keeps dropping. They been hawking up inflation just to try and avoid what’s transpiring now.

    That’s one helluva box they’re in.

  5. Norman commented on Nov 27

    Well, if Pisani says that foreigners are locking in ‘profits’ it must be so. Very comforting.

  6. lurker commented on Nov 27

    NAZ down 45 points and almost 2% as of lunchtime.

  7. lurker commented on Nov 27

    Down 50+ on the NAZ.

  8. lurker2 commented on Nov 27

    Down 50.8 on the Naz as of 2:24:34

  9. Emmanuel commented on Nov 27

    Maybe it’s time to short index futures and enjoy the year-end bust. The perma-bulls and their ho, ho, hos should be in full retreat soon.

  10. swapped commented on Nov 27

    Anyone notice that real 30 year rate has climbed quite a bit lately?

    And what’s with the steep decline in the 1 year inflation rate? Any explantions?

  11. winjr commented on Nov 27

    “There will no doubt be another “Fed is done” rally. ”

    No. Not this time.

    My bet is that the markets won’t be happy if the Fed doesn’t give some hint that soon they will cut.

  12. Bob A commented on Nov 27

    I’m sure glad you’re around Lurker because here in the darkness of my cave there’s no other way of know where the indexes are at…

  13. Michael C. commented on Nov 27

    Here’s some Cramer as humor for a Monday morning. Somebody’s gotta call this loon out.

    Last Wednesday (SPX 1405, NDX 1815):

    “I keep telling you, this market isn’t going to let you in. You could pick something that’s down today and bet it will be up next week.” (Mind you, he was telling people to buy stocks up $1 or $4, and I posted what an idiotic statement it was at the time. Is he asking us to return to the 1999 mentality? Sheesh)

    Today (SPX 1381, NDX 1780):

    “I believe it is still too early to shop. This is just day two of the decline and that means there could be more ahead and better chances to buy back the same stocks you like. ”

    How many investors does this fucking loon hurt? Has he done good for the industry? Yes, he has. But he doesn’t reign himself in from hurting alot of investors either.

  14. winjr commented on Nov 27

    “CNBC’s Bob Pisani quotes several unnamed traders who have said that in light of the dollar drop, overseas investors are repatriating some cash, locking in their profits for the year, and eliminating additional currency risk . .”

    He also said that the foreign sellers would be finished around 11:30 or noon, suggesting that the selloff would end.

    Didn’t happen.

  15. bodanker commented on Nov 27

    Well, there’s the 1% down day… the streak is over.

  16. Kevin_r commented on Nov 27

    I had been wondering where the payback/negative feedback would show up if the stock market rally of the past months was liquidity-driven but running against the fundamentals. (This is what many on this blog have said.)
    Today’s action suggests that the achilles heel in all this may be the $US.
    If the Fed winds up having to choose between lowering interest rates/pumping in liquidity to protect the US economy from the effects of the housing crash vs. raising interest rates/pulling out liquidity to protect the $US, they may really have no good options. Iraq for central bankers.

  17. Kevin_r commented on Nov 27

    To clarify my last post, I do believe there has been much extra liquidity recently, but I can not tell if it is the Fed doing it on purpose or the Chinese and/or oil exporters with spare dollars burning holes in their pockets (or in the floors of their vaults).

  18. V L commented on Nov 27

    “…I can not tell if it is the Fed doing it on purpose…”

    Hank (US Treasury) is responsible for the spike in liquidity (not Ben, the Fed). Because Ben cannot cut rates, Hank has been injecting liquidity and hopping it will boost our slumping economy (and they also need cash to make interest payments on ballooning US debt); instead of the boost we got multiple liquidity driven equities and commodities bubbles (a.k.a. Phony Wall Street Rally of 2006) and the sinking US dollar as a bonus. (I am sure his buddies from Goldman are very happy about the bubbles and their end-of –the-year bonuses)
    A few weeks ago there was a post here about how US Treasury has been working overtime lately and injecting liquidity like there is no tomorrow.

  19. Si commented on Nov 27

    Kevin / VL, this is what happens when you try and exterminate the business cycle. The financial universe will want its pound of flesh eventually no matter what tricks policy makers try to pull. However most of these guys seem to live in a fairyland of Barby doll castles and my little ponies, they don’t seem to understand this simple real world point.

  20. Insurance Guy commented on Nov 27

    V L,

    I think crediting Hank Paulson’s darker ambitions for recent increased repo activity by the Treasury may be a little far fetched. Mish has a good recent post explaining open market operations at the Fed.


    The Fed targets a specific short term interest rate. At that rate, the Fed is obliged to supply all the funds for borrowing that are demanded by the market (member banks). Whether the Fed or the Treasury is providing the funds to be borrowed is irrelevent. Neither body can force banks to borrow. The demand just exists at the given short term interest rate.

    Bottom line, if there is too much liquidity, its because the rate is too low. But in reality, the Fed doesn’t put much stock in money supply. If it doesn’t show up in the inflation numbers, it doesn’t matter.

    And I guess that’s one of the main reasons we are where we are today.

  21. ECONOMISTA NON GRATA commented on Nov 27

    Goldilocks……. Goldilocks……… Goldilocks…….. Goldilocks……. Let’s just give it another shot. ;)


  22. m3 commented on Nov 27

    i agree w/insurance guy.

    as much as i want to rail on the fed, the idea that there are a couple guys running around in the dark goosing the world with cash to boost the SPX up a hundred points or so doesn’t make any sense to me. especially when they know what’s at stake (CPI at the highest levels in years, asset bubbles, etc.).

    the bottom line is that the gov’t doesn’t (and shouldn’t) want to interfere with markets (even bubblicious ones), but all too often they inadvertantly do.

    the problem is the gov’t doesn’t have the tools to aptly correct their policy mistakes when they do arise.

    *that* is the key issue right now.

  23. Mike commented on Nov 27

    “the problem is the gov’t doesn’t have the tools to aptly correct their policy mistakes when they do arise.” –m3

    Ahhh, yes, the ever elusive power to cancel debts…

  24. Philippe RAFAT commented on Nov 27

    Time changes ?
    This money printing frenzy is not only the characteristic of the US central bank, the ECB had made comitments that money supply M3 will not exceed 5% within its corridor and it is now standing at 8%! and the ECB is said to look at M3 as a guide for its monetary policy ie Money supply matters.
    It seems that the absorption effect of currencies which are international and sometimes domestic means of payment outside their boundaries provide a time lag before overflows. It was not the case for the assignat of Louis XV or the Republic of Weimar.

  25. V L commented on Nov 27

    “I think crediting Hank Paulson’s darker ambitions for recent increased repo activity by the Treasury may be a little far fetched.”

    I am sure Hank Paulson believes that he is doing good to everybody – similar as Bush believed when he ordered to invade Iraq.

    “The demand just exists at the given short term interest rate.”

    Mish is missing other aspects of the demand. He is assuming that the demand for US dollars is only internal but there are other external components.

    For example, how do you explain that higher interest rates actually increase the demand for USD from international currency speculators? What about JPY/USD carry trades (borrowing JPY at near zero, converting JPY into USD and collecting 5.25% interest); making the interest higher makes this kind of trades more attractive; thus increases the demand for USD. (You can only imagine what will happen when suddenly all these trades get converted back from USD into JPY).

  26. my1 commented on Nov 27

    Here’s the way I see it. Markets work in cycles. Nothing to do with “Macro”, it has much more to do with reality. What goes up must come down. The ONLY reason why housing MUST come down substantially is BECAUSE it has gone far higher than it should have been allowed (blame ‘Too Low’ Interest Rates or whatever have you).

    So too does this apply to markets, it doesn’t matter in the slightest “who” is pumping up the markets. They WILL trend lower at some unknown point because they MUST trend lower (this week or next year? who knows?).

    They MUST, because there is no way you can only hold back an impending Bear without holding back the Bull that preceded it.

    Once again not referring to bulls/bears in cycle but in “what goes up must come down”. You can’t only cap the bottom and expect things to go up forever.

  27. Si commented on Nov 28

    Nice one my1, similar to what I have been saying for ages.
    The problem we have is that a non cyclical universe seems to have appeared within the fed offices. In this place it is seems, you can just get rid of any downside cycle action by flopping interest rates around.

  28. Insurance Guy commented on Nov 28

    V L,

    You’re right. The demand for USD increases as the interest rate rises – because people want to invest at new USD (higher) rates. That said, the demand to borrow in USD is reduced when the interest rate rises.

    The money supply increases through lending activities, not because of investor demand for USD. The Fed can increase money supply by lending funds at low rates to banks who then turn around and lend to consumers and businesses.

    Increasing the interest rate does increase the attractiveness of the JPY/USD carry trade, but that trade doesn’t explain the increase in M3 Barry has written about. It would no doubt increase worldwide liquidity and specifically the supply of Yen – but that can hardly be attributed to the Treasury.

  29. my1 commented on Nov 28

    “The Fed can increase money supply by lending funds at low rates to banks who then turn around and lend to consumers and businesses.”

    All thanks to Fractional-Reserve Banking of course, but we all know where that ends. It’s all in the excess credit supply. It seems we don’t even have to have our money backed by paper anymore!!!

  30. V L commented on Nov 28

    “The Fed can increase money supply by lending funds at low rates to banks who then turn around and lend to consumers and businesses.”

    Insurance Guy,

    JPY/USD carry trade was only one example. You are missing one major fact that all those JPY need to be converted into USD and all USD come for US Treasury. (Unless you think that a guy in North Korea prints USD)

    You are assuming that these funds end up with consumers and businesses and I am saying that a part of these funds also end up with Wall Street speculators and hedge funds, and eventually in asset bubbles.

  31. Insurance Guy commented on Nov 28

    V L,

    I don’t disagree that their is too much liquidity. I don’t disagree that liquidity has caused massive investment in alternative investments and asset bubbles. I just think its because rates are set too low, not because the Treasury is “injecting money”.

    Trivial difference, but I want the blame to be placed where I think it deserves to be placed.

  32. Bearabull commented on Nov 28

    Anyone have thoughts on the reaction to today’s figures (durable goods, housing)? I liked how the headlines focused on the tiny increase in October home resales (over the adjusted September figure) and not the record 3.5% decrease in median prices. The fact that the rate of price (and home equity) erosion is increasing should be alarming.

    Market volatility is pretty wild today.

  33. zentrader commented on Dec 3

    All Doom and Gloom all the time over here. No wonder it is the most popular economics blog. It gives the bearish herd all the pessimistic psychological reinforcement that they crave.


    BR: Its all-reality-all-the-time. If you want Happy-talk or Cheerleading, you can find plenty of that everywhere else.

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