Barron’s Asks: Bear Market Rally?

Barrons_indices_2In Barron’s The Trader column,
Kopin Tan asks: "Is the Stock Market’s recent resurgence just an ephemeral, bear-market rally?"

Before answering that, have a look at the chart at right. It accompanied his questions; the black lines are my own.

There are several things to be gleaned from this:

First, the Nasdaq remains the healthiest of the major indices. Thats could be due to strong sectors within it (i.e., Enterprise Software). Or it could be due to specific stock leadership, namely  — Google (GOOG), Apple (AAPL), Research in Motion (RIMM), or Baidu.com (BIDU).

Second, the down trend seems to be not yet quite vanquished. What was described by some as a breakout is now looking like it could turn out to be a false breakout. 

Third, the SPX and Dow are at critical levels — a failure at the trend line likely means more downside to come. And, the recent May highs appear to be a lower low to this old traders eyes.  Any failure at this level means more trouble ahead.

Last, a further failure at the March lows would be disastrous for the indices.

Your mileage may vary . . .

Source:
Oil, Unemployment Rise, Stocks Fall 
KOPIN TAN   
Barron’s June 9, 2008 
http://online.barrons.com/article/SB121279288358653337.html

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  1. Aaron commented on Jun 7

    Love the site and check in a few times a day, but Im not all that impressed with the technical analysis approach taken in this post.

    http://stockcharts.com/h-sc/ui?s=$SPX&p=W&yr=8&mn=0&dy=0&id=p77309536087&a=140357040

    Bear market rallies typically peak at the 200 DMA. Chart these indexes, especially the S&P along with their 200 DMA and youll see the technical explanation for its failure.

    note where the 2001-2003 rallies peaked as compared to the 1440 close in mid-May

  2. Mich(^IXIC1881) commented on Jun 7

    The strength of Nasdaq was there in pre 2008 as well. In summer of 2007 I bought equal amounts of DXD and QID..They were both losing positions for a while, then DXD started to recover and QID was lagging and lagging. I remember thinking to myself “should I switch to DXD taking my loses on QID. Probably because AAPL, GOOG, AMZN,etc is the only competitive edge US has left hence they might go relatively less damaged through this”… I was worried but didn’t change my positions and then came 2008 and QID took off crazy, evening the difference with DXD…

  3. Barry Ritholtz commented on Jun 7

    Aaron,

    Agreed about the 200 day MA (now watch the 200 week MA !)

    But there is plenty of validity for trendlines — don’t be too quick to dismiss them . . .

  4. ZackAttack commented on Jun 7

    I’m compiling a list right now of “Bear bottom” callers.

    Prudence demands public shaming and revocation of their pundit cards.

  5. DL commented on Jun 7

    From 6/1/07 to 11/1/07, we saw a divergence between XLF and QQQQ; after that the QQQQ fell hard.

    We’ve been seeing a similar divergence since the March lows. My take is that the QQQQ will again follow the XLF down.

  6. Mike Santoli commented on Jun 7

    THE S&P CLOSED BELOW what many chart watchers were flagging as a make-or-break level of 1370 on the S&P 500. Listen for the alarm bells from this group ahead of Monday’s opening.

    Yet Andrew Burkly of Brown Brothers Harriman is watching 1350. He says of a half-dozen bear-market bottoms over five decades, none has given up more than half the gains from a rally off a “re-tested” low, such as the one in March. That threshold sits at 1350.

  7. me commented on Jun 7

    Funny. You ignored January. Can’t blame you. No one wants to imagine a steep decline.

    ~~~

    BR: Didn’t ignore it — the lower low in March is now more importnant

  8. Palm Me Some Rubles commented on Jun 7

    Heh, heh, heh. Medvedev. And this from a country that literally runs on bribery.

    The only leadership that could come from east of Europe would be a paternalistic, brutal oppression.

    I believe the Western, Matrix-esque style of self delusional, propagandic-idealism is much more preferred, as well as much more successful in holding the attention of the masses.

    Nobody gives a shit what Russia thinks.

  9. Jay commented on Jun 7

    IMO Equities are calling the Feds bluff re holding interest rates steady. We will challenge the March low ahead of the 24/25 meeting. Gold and Oil will rally in anticipation of Uncle Ben folding. Look for post-Vix +40 opportunity to reverse. The Fed has to throw the US consumer or the Financials under the bus. Which will it be?

  10. Estragon commented on Jun 7

    BR – “But there is plenty of validity for trendlines — don’t be too quick to dismiss them”

    Agreed. The validity of any technical indicator is a derivative of the degree to which the indicator is followed (and acted on). It doesn’t really matter if the indicator is phases of the moon or the color of BR’s sweater. What matters is whether enough money thinks it matters.

  11. VennData commented on Jun 7

    We’re beginning to see the signs that the stimulus may be working,” Mr. Bush said during a swearing-in ceremony for the housing secretary, Steven C. Preston.

    http://www.nytimes.com/2008/06/07/business/07econ.html?_r=1&oref=slogin

    Bush has got some interesting indicators he’s looking at… I wonder what they might be? Left-handed five iron sales up at Sportmart in Toledo? Average Slurpee sizes at trend in states beginning with “M?” Cheney’s girth?

  12. MitchN commented on Jun 7

    Jay wrote:

    The Fed has to throw the US consumer or the Financials under the bus. Which will it be?

    Buh-bye Financials. And I want to see that list of bottom callers. Here’s a start, in no particular order:

    Joe Kiernan
    Steve Liesman
    Rick Santelli
    Michele Caruso-Cabrera
    Dennis Kneale
    Jim Cramer

    (notice a theme here…)

  13. Greg commented on Jun 7

    MitchN, you can’t seriously believe the Fed will deviate from the route it’s been following for 20 years?

    I’d say buh bye US Consumer.

  14. Max Thrax commented on Jun 7

    Looks like the trend will remain downward but momentum will be halted due to that broken trend line now acting as support. Look for lots of chop chop in a slight downward trend.

  15. D. commented on Jun 7

    the Western, Matrix-esque style of self delusional, propagandic-idealism

    I think it is simply called delusion of free-will.

  16. Good Money Blog commented on Jun 7

    Just like the last recession, there’re many fake rallies in a bear market (this is just the first one).

    I sold my only taxable position last month since I didn’t see any improvement in the economy (fundamentals), and everything’s way overbought at the time.

    Don’t be surprised if we see the March low again in the summer. Other than automatic purchases, just be sure you have enough cash for any bargains.

  17. Jim Haygood commented on Jun 7

    Nobody mentioned the Dow Transports. But if I’m not mistaken, they set a record high this week, or close to it. And that is very bizarre, with runaway oil prices and weakening GDP growth.

    Meanwhile, the Dow Industrials are the weak sister of the averages. During the past few weeks, they’ve badly underperformed the S&P, and especially the Naz and RUT.

    I’m no Dow Theory export, but there’s definitely a divergence here. I lean toward it being resolved on the downside. Where is my 20% decline?

  18. John commented on Jun 7

    Well, lets see. Given the Fundamental Backdrop for the U.S. consumer (~71% of GDP) should there be any doubt that this is (has been) simply a Bear Market Rally? DOW, IXIC, TRAN, WSLH etc. ALL broke decisevly through their 200 dma’s. The Transports (specifically the rails) have broken above the 200 dma (but are looking Toppy to me) with the rest still below.
    I agree with Barry that the Big Rise in the Nasdaq has been largely due to big moves in about 9-10 stocks– APPL, GOOG, RIMM, AMZN, QCOM etc., and is not broad based. These charts (Apple, Google and Rimm) look Ripe for a substantial pull back — especially when the Momentum/Hedge Fund traders leave. Not to say that they couldn’t go higher short-term– I think they probably will– (pushing the Nasdaq into overhead resistance at the 2600-2650 level) upon a substantial pullback in the price of Oil/the Dollar resumes it’s rise.
    But with the steep decline in Home Values (especially California –big contributor to GDP) with no bottom yet in sight, $4.00+ dollar a gallon gas (even more for diesel), YOY increases across the board for commodities leading to increasing food and energy bills, (not to mention current healthcare costs and education), I really don’t see a case as to why these Indexes are beginning (or should continue) a Bull Market.
    I keep hearing about how Technology is the place to be and that their Balance sheets have never been in better shape, with some 3 Trillion dollars sitting on the sidelines “just waiting” to be pumped into Equities.
    I don’t agree. That money can stay parked right where it is– on the sidelines– or find another safe home someplace else. Why should companies invest heavily improving their business if the consumer confidence continues to deteriorate and the U.S. consumer pulls back heavily in their spending– especially for the lastest Piece of Techno-Crap. How much in home equity has been lost to the downturn in the housing market? I’m willing to bet it’s at least (or is going to be with Mortgage Rates holding steady and/or Rising) somewhere on the order of magnitude on this purported sidelined amount of cash (not including all of the bad debt currently sitting OFF the Major Investment and Commercial Banks Balance Sheets).
    If this is the start of a new Bull Market I believe it would be the shortest Bear Market in history — from at least a P/E multiple contraction/expansion standpoint.
    In my view the March “Re-test” of the January lows (+/- 3% on the INDU, SPX) is way too early to call as a successful “retest” of anything.
    I don’t see these Indices trending higher for much longer. I don’t see it from a Technical Perspective. I especially don’t see it from a Fundamental Perspective–especially with respect to the U.S. consumer AND U.S. Commercial/Investment Bank balance sheet.
    And I don’t see what the big craze is for “Technology Stocks”. The ‘new’ 3G I-Phone is quite probably already priced into AAPl’s stock, and GOOG and RIMM are looking to pullback substantially when the other indices resume their downtrends, and will yank the Tech sector down with them.
    If we’re at least halfway through the credit crises, according to Jamie Dimon or Hank Paulson, why are the Major Financial Stocks stocks still selling off?
    If the fundamental backdrop of the economy is relatively sound why does at least one member of the PWG on Financial Markets (including “The Decider” himself) need to make special public appearances to put the Creme onto the Economic Outlook, upon substantial Stock Market Sell-Offs?
    I think its going to be ‘Awhile’ before the Major Banks rebuild their capital. I think its going to be ‘Awhile’ before credit card companies extend credit as in years past…

  19. What Mr. Crude Oil Sees Ahead commented on Jun 7

    …and the interview wit Arjun Murti is there, too.
    “Arjun Murti says gas may have to hit $5.75 a gallon before consumption cools enough to take the heat off fuel prices.”

  20. Robert commented on Jun 7

    Having started in the business as a Merrill broker in January 1973 at the very top in that era and retired years ago, I have one thing I would like to pass on.
    Everyone is waiting for the bounce. In my opinion our economy is in deep trouble and may never regain its footing….well, maybe one day. I urge all readers to follow Richard Bernstein and David Rosenberg of Merrill for their insights.
    Preserve your cash. In my experience it is wisest to save when yields are next to nothing and to invest when interest rates are the highest.
    I predict that few will beat 2 or 3 % in the next few years, and most will be probably will be large losers. This is a drip drip drip down market. Yes, there are always winners, but at these times safe income is the name of the game.
    Barry, i would urge you and others to publish your 1 year and 3 year returns so we investors can gauge how successful you really are. Surprise us.

  21. michange commented on Jun 7

    All this is not peak oil, this is just dollar bottom out.

    Thanks to ponzi CDSs, U.S. trade deficit and debt are just coming to maturity.

    If I were the Chinese/ Indian/ Brazilian/ Russian, I would convert all my dollars into oil, waiting for the credit crunch and the recession to enact the much awaited bankrupcity of the U.S.

    If there should be a contratrian indicator to look for, I’d bet on all those recent (and so lame) strong dollar allegations from the over-rotten US talking heads.

    I bet on a black monday next week, lead by the credit crunch. Have a look at this graph :
    http://tinyurl.com/5h3puk

  22. The Financial Philosopher commented on Jun 7

    “Those who have knowledge, don’t predict. Those who predict, don’t have knowledge.” ~ Lao Tzu

  23. mh497 commented on Jun 7

    Given everything that’s gone on, historic housing bust, $140 oil, the recession will be televised, etc, you have to say that this stock market is amazing in it’s ability to take a punch.

    If the news were to get better, and ultimately it will, there will be one heck of a rally.

  24. catman commented on Jun 7

    so I got my bush dough, so I bought some golf gear, it all came from china, so Im 10% cash, 10% short, and looking to buy Suez. Can Pinky and the Brain pull one more gaff and make my canroys kick up their heels? Stay tuned I guess.

  25. contagion2012 commented on Jun 7

    I’d say the consumer is getting steam-rolled pretty thoroughly at this point, and given the nature of our political system and its relationships with the financial system, i don’t see that changing anytime soon. Not until the financial system collapses due to the total erradication of consumer purchasing power i’d imagine…

  26. drey commented on Jun 8

    “Given everything that’s gone on, historic housing bust, $140 oil, the recession will be televised, etc, you have to say that this stock market is amazing in it’s ability to take a punch.”

    Or just amazing in its ability to remain in denial.

    “If the news were to get better, and ultimately it will, there will be one heck of a rally.”

    The news isn’t gonna get substantively better for a long, long time. As someone on this blog observed, we are witnessing the slowest train wreck in history.

  27. Barry Ritholtz commented on Jun 8

    Robert

    We run managed accounts, so there are no audited returns like a mutual or hedge fund.

    Without running afoul of the lawyers, I can tell you the average account we manage was up double digits in 2007 (some more, some less). We are on track to hit similar numbers in 2008 — we are currently running about 25% cash, 15% short, and the rest long.

    Its no secret how we did it — a few jumbo winners in the portfolio (MOS, CMG) and avoiding debacles in Financials, Housing and Retail. (Although we did have some Financials and Homebuilders for a trade in 2008).

    Between the mentions here, as well as the Fusion blog, you can pretty much reverse engineer our holdings…

    BR

  28. Bruce in Tennessee commented on Jun 8

    Robert,

    Completely agree with your comments about cash being king here. I am not a retired broker, but have been doing my own investing since 1983. What most of the longs don’t seem to realize is that there is a “perfect storm” of financial shocks, and the continue to get worse, not better, or at least drag on without a resolution.

    First, oil prices and what they mean for the economy.

    Second, declining home values, and what this means..

    Third, difficulty in the credit markets, and relative inability to obtain capital.

    How could a prudent individual not wish to preserve capital here??

    I understand about swimming upstream, but that seems best done by salmon, not investors……..

  29. guru commented on Jun 8

    What about erasing your trend lines and draw new ones connecting the October, 2006 and recent May peak pivot points? Then the very tentative uptick since March is nothing more than a minor retracement in what is the prevailing Bear Market.

  30. MitchN commented on Jun 8

    Greg wrote:

    MitchN, you can’t seriously believe the Fed will deviate from the route it’s been following for 20 years? I’d say buh bye US Consumer.

    The Fed will not throw 70% of the U.S. economy (the consumer) under the bus by persisting in their weak-dollar policy — a policy that is largely responsible for the rise in oil and (real) inflation closing in on 7 percent. If they do, there will be blood in the streets. It’s time for the geniuses on Wall Street to man up and take their medicine.

  31. Risk Averse Alert commented on Jun 9

    Following a last-gasp rally over the days straight ahead, a head-spinning, 20% meltdown seems a reasonable expectation, particularly since the market’s decline Dec ’07 through Mar ’08 lacked the character of a capitulation … especially when viewed in comparison to last summer’s thud.

    Trouble many bears will have following this probable thumping, is believing too soon the beginning of the end is nigh, leaving them far too bearish while the market melts up, and therefore subject to derision at a time when their cautionary wisdom would better be heeded in the grand scheme of things.

    They say history does not repeat itself but often it rhymes. Seems to me it might be late ’28 or early ’29…

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