The Larry Kudlow Recession Summer Rally

Sometime last week, I heard my pal Larry Kudlow admit "We are in a Mild Recession."

That sent me scampering to the Modern Kudlow To Standard English Translation Guide, to see what this meant. That translates to "We are in a broad and deep recession."

Back on July 15, I suggested it was time to cover shorts for a Bear market rally, reiterating an earlier — too early — call for a move higher. But this ? LK admitting a recession ? This was big news. Larry is a perennial optimist, so its worth noting when he sees anything negative. In February, he broached the  mere possibility of a mild recession, and last week, he saw (finally!) that a recession is here. I turned to one of my fellow fisherman/economists in Maine, and said "Larry used the R word? The negativity out there must really be tremendous. That means we are due for a counter-trend rally." 

And so it was.

Let’s look at what the  key elements were to the Tuesday’s 3% rally.

By the time we got the FOMC announcement, markets were already up 2%. After the 2:15pm announcement, they tacked on another 1%. Stock Charts has a terrific Market Summary, showing a wide range of assets. Scrolling thru that list of sector gainers and losers, we see Airlines up an astonishing ~10% on the day (9.60%), Banks gained nearly 5.5%, Brokers 4.6%, all the while Gold dropped 5%. Gold the metal fell $21.80 to break $900 ($886.10) losing -2.4% on the day.

And Crude oil, the key to the recent gains, broke below $120 — losing $2.24 (1.84%) to close at $119.17.

If I told you a year ago that Oil dropping below $120 would ignite a 3% rally, you would have thought me daft.

Aside from the Crude spark, a few other items were noteworthy. Markets were fairly (though not very) oversold. Richard Russell tracks this condition via his "PTI" index. It closed Monday at the lowest reading since mid-May of 2007

Confirming that oversold condition was Lowry’s Selling Pressure Index. It closed at a multi-year high. This suggests heavy selling into the market.

Also of significance: Yesterday was the first 90% day we have seen June 26th. On the NYSE, there were 2526 advancers and 862 decliners. The aforementioned Richard Russell notes that the up volume was
91.4%. Paul Desmond of Lowry’s states that bottoms are usually accompanied by a series of 90% up and down days. The absence of 90% Days is very unusual, especially given the Uptick Rule has not been in place.  Since this was the first 90% day in 2 months, that makes it noteworthy.

(UPDATE: AUGUST 6, 2008 10:42am: According to my trusty Bloomberg terminal, yesterday’s Total NYSE
Volume was 1227.05; the Up Volume was 1149.09. That makes for a 93.6%
up day by my math

Back on July 15, the Dow made a closing low of 10962.54 — the
lowest Dow close since July 2006. Yesterday, it closed at 11,615.77. So
we have yet to run even 1,000 points. Hence, despite the turmoil, this is still early in the rally’s lifespan.


On the other side of the ledger, we have Lowry’s Selling Pressure Index at those highs. Normally, it declines well
ahead of a market bottom
. The new high in this Index does not equate
with the thesis that we’re near a market bottom.

Further, Paul Desmond tells me that since we did not have any 90% Down Days close to the mid-July low, we have not seen the required selling exhaustion for a major bottom.

Further, its been 3 weeks since the lows, and we did not have a 90%
Upside Day quickly after the rally began. Paul’s prior work on market bottoms suggests that almost always accompanies major market bottoms. He views the recent rallies as primarily short-covering by
hedge funds rather than accumulation from investors. I agree.

Bottom line: A classic Bear Market rally, one that could run for a few more weeks. My best guess is to 12,250 – 12,500.


Kudlow: Possibility of a Mild Recession (February 2008)

Wild Times on Wall Street (July 16, 2008)

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. leftback commented on Aug 6

    Barry – is that SPX 1300-1310 for the rest of us who don’t share Larry’s obsession with the Dow?

  2. PureGuesswork commented on Aug 6

    One of the differences I have noticed about this current bear market rally and the one which began at the mid-March Bear Sterns low is the caution displayed by market players who were so joyfully bullish back in March (“The worst is over!”) This time, a day or two after the S&P bounced off the 1200 level in mid-July I heard the talking heads on CNBC referring to it plainly as “a bear market rally,” and wondering aloud exactly when would be the time to sell into it. Could it be that a bear market rally will continue as long as it is perceived as a “bear market rally?” Or, put another way, is the answer to the question posed by the talking heads on CNBC: the time to sell into this bear market rally will be when they no longer refer to it as a bear market rally but as a new bull market.

  3. Pete commented on Aug 6

    BR, where does the 90% up-down figure come from? The ADV/DEC you quoted and the up
    volume and down volume in the WSJ Market Data
    Center was 1140716/261689.
    Thanks, love TBP!

  4. Douglas Watts commented on Aug 6

    A word from the maestro, Ben Stein:

    I’m not much of a believer in conspiracy theories. I’ve seen up close and personal how wrong they were in the case of my old boss, Richard M. Nixon. He was not a criminal mastermind. He was not paying attention to a bunch of juvenile delinquent aides and they did him dirt. It was a case of an absent minded father, not a KGB plot.


  5. Neal commented on Aug 6

    Yes, it’s true, the confirmation of a collapsing economy by a drop in oli consumption is very good news indeed. It’s time to party!!

    Tomorrow, the hangover–what really has chaged other than there is more confirmation that we are really, really screwed?

    If the economy picks up speed, demand will go up and prices will go up. If the economy picks up interest rate must increase leading to more foreclosures.

    It’s sad when the best thing for the economy is to remain buckled down in a recessionary posture.

  6. Greg0658 commented on Aug 6

    BR – what happened to your 6,000 or was it 8,000 set point … halving post-war

    I still think thats a possibility – the 3 wars are straining our economy … drugs / immigration / jihod

    I’m not sure any of those are winnable – but the effort is expensive for the taxpayers … on the other hand we are in disaster capitalism and it is our economy

  7. uncool commented on Aug 6

    Greg0658. Come on, we are winning each of them every day, for years now…..I see it on TV all the time.LOL

  8. DL commented on Aug 6

    L.K. also said that the recession is now more than 85% over (the one that, two months ago, he believed was nowhere in sight).

    I guess that means it’ll be a long, drawn out affair.

  9. Rich Shinnick commented on Aug 6


    Maybe, maybe not. My feeling is no rally beyond yesterday. Things happen much faster these days. Either way, we need to find about $1.5 trillion in hidden losses and see some dead bodies float to the top of the cess pool before any rally is sustainable.

    I know way to many Alt-A types that have no way out and are looking at deathly resets in the next few months. I really do believe that subprime was just a warm-up and I think that Mr. Market is going to “get it” a lot sooner rather than later

    Of course, there will have to be a catalyst. WAMU failing? BAC suddenly raising capital when they said they didn’t need any? JPM reporting an extreme HELOC write-down?

    Don’t get me wrong, I really want to believe and I really want to be positive and go long, but like many who read this blog, I spend way to much time looking at the numbers and educating myself.

    Blind faith is, unfortunately, no way to provide for your family.

  10. Douglas Watts commented on Aug 6

    Mr. Kudlow also said it tastes just like chicken …

  11. Chief Tomahawk commented on Aug 6

    Good piece, BR.

    So does the rally stop once the August Jobs report comes out? I have a feeling the next could be our first venture into a 6-figure job loss number.

  12. Gloomy commented on Aug 6

    Think of how many hedge funds are long commodities. As oil dropped it was predictable that they would be squeezed and need to raise cash by closing their short positions.

  13. Vermont Trader commented on Aug 6

    BR – I think we are in a new trading range from SP500 1200 to 1300 with a risk of breaking the downside…

    I continue to short all sharp rallies and set entry and exit points around major economic and earnings releases.

    Things are bad out there.

  14. Alaskan_Pete commented on Aug 6

    I don’t get it Barry. Maybe it’s because he gave you a first real break into TV, maybe he’s a really stand-up guy when not playing resident GOP shill/clown on the telly. But to bring up Kudlow, as if he has ANY relevance, is terribly confusing to me.

    The man is utterly, completely WRONG 98% of the time. He was a FAILURE in the industry, and much like his stable-mate Kramer, only survives because he puts on the big shoes and funny nose and does schtick. He is an entertainer, nothing more, and his views on markets and politics are worth what you pay for them…nada.

    Good writing is a chore, and set-ups in the lede often use colorful/anecdotal stuff to liven up the piece before getting into drab minutae. So I understand the structure of the piece, but it could have stood on it’s own without the Kudlow references. It pains me to see you give him relevance by mentioning him at all (and yes, negative attention does provide credibility cover). Old cliche’ “There’s no such thing as bad publicity”. Please stop enabling this clown. Or don’t. Not my show and not my place to push my agenda…GYOFBlog comes to mind. But I give you this feedback as a regular, long time reader, not someone trying to push my pet issue or whining “why don’t you write about XYZ issue”.

  15. DavidB commented on Aug 6

    VIX is getting close to crashing through the 20 mark too

  16. Blue Bellied Yankee commented on Aug 6

    Kicking the can down the road…. How long can the party last.

    So where does all of this stuff end, the FED throwing a life line to Fannie/Freddie. After all the Asians didn’t want to get stuck with all those worthless GSE bonds.

    The FED saving Bear Sterns and the investment banks. The FED taking all kinds of junk onto their books. The delay of the accounting rules that says your debt has to show on your books (now that would be a novel concept). Rebates and bail outs. A Whitehouse projection of a $490 billion deficit.

    I see no way this can end happily, but the real question is can the FED/Federal government keep the party rolling into 2009. Getting to 2009 has to be the objective, no one can be stupid enough to think this little party can go past curfew.

    So I say we could have a market rally into 2009, after that the wheels fall off.

  17. Michael Donnelly commented on Aug 6

    God that is embarrassing.

    Larry goes from no recession, yes recession, no recession to yes recession all within THIS YEAR.

    Data from WSJ: Larry on their survey

    January 30% chance of recession
    April 70%
    June 20%
    August “”We are in a Mild Recession.”

  18. Bob A commented on Aug 6

    Larry Kudlow.. you mean the same dude who had the white witch from hell on his show the other night?

  19. Jim Haygood commented on Aug 6

    “According to my trusty Bloomberg terminal, yesterday’s Total NYSE Volume was 1227.05; the Up Volume was 1149.09. That makes for a 93.6% up day by my math).”

    These volume statistics baffle me. NYSE total volume, as reported on Yahoo Finance, is in the 3 to 5 billion range most days (e.g., about 3.7 billion at 3:30 p.m. today).

    NYSE volume of 1227.5 million (i.e., 1.23 billion) seems way too low. What are they excluding — bonds? ETFs? Third-party exchanges? I just don’t get it.

    I also was wondering whether yesterday was a 90% day. So far, I just don’t know. Can’t find any volume statistics that I trust, or which make sense. HELP!

  20. mik commented on Aug 6

    I’m non-sophisticated investor with a modest amount in stocks, bonds and real estate. I has been investing for 30 years, my small needs for investment knowledge satisfied by Bob Brinker radio show and John Bogle books.

    Larry (Dr?) Kudlow filled for Brinker couple times a few years ago.
    It is hard to describe a level of ignorance of that man.

    Brinker show back then was mostly callers questions and host responses.
    Kudlow had one and only one answer to all questions:
    “I’m not following XXXX (stock, fund, mortgage, etc) but I believe in American companies/entrepreneurs, you should invest and wait a little, it will go up.”

    Does the man has mortgage? Did he ever bought a stock online or thru broker?

    He wasn’t been able to answer fairly trivial questions of that nature.

    But he was big on monologues about saintly entrepreneurs, godliness and beauty of Free Trade and Open Borders and evils of Democrats.

    What is wrong with people who watch his show? Guy is ignorant crank, how he can have a TV program?
    He is not qualified to teach middle-school economics class.

  21. Niclas commented on Aug 6

    Kudolw is right in the long term: Free trade is supergood for the world. Low taxes is also good. What he misses is the shortterm. What happened to the America that took recessions as an oppurtunity to invent itself from scratch? What happened to americans TRUE beilief in capitalism? Why are americans sooooooo terrified of an recession?

    Oh BTW, S&P will rally up to about 1360.

  22. freeman commented on Aug 6

    All gays (Kudlow) are optimistic on the outside. Inside they are demented, scared and confused, hence the GAYNESS as Larry shows. Don’t believe me? just watch his mannerisms and his ties….they say it all.

  23. Mike in NOLa commented on Aug 6

    DavidB: VIX actually breached 20 today for a short time. Has dropped 10% in the last two days. For such negativity on CNBC there’s a lot of complacency.

    I did notice earlier this week that some of the CNBC hosts were asking negative questions of some of the guests, which I thought was odd. Not Kneale of course. Trying to get some credibility? Maybe all the criticism here is having an effect? Nah.

  24. leftback commented on Aug 6


    Low VIX < 20 has been a good predictor of turn-arounds. Remember: in August, Thursday is the new Friday, and in a Bear market nobody wants to go long stocks into the weekend. Got SKF? ;-)

  25. Mike in NOLa commented on Aug 6


    “Got SKF?” No, full up with the SRS you were pushing :) Also increased holdings of DUG, SMN and QID.

  26. sex shop commented on Aug 8

    That looks like about 26% thermal efficiency

Posted Under