The final spike of this bear market rally?
Posted on 16 July 2009 with no comments from readers
Traders with long experience of bear market rallies inform me that it is usual to see a final spike at the end of a long rally like the one we have had since the lows of March.
Is that what we are now seeing in US stocks? This is summertime and trading is very thin but the sudden upward moves in the S&P look like a last hurrah.
Goldman Sachs
The immediate cause was banking guru Meredith Whitney’s bullish note on Goldman Sachs and then the actual profits from the original masters-of-the-universe. Well, if they can’t coordinate a rally on the back of their own results who can?
When market volumes are low just a little buying has an exaggerated impact, and that seems to be what is happening this week. Throw in a nice number like the 20 per cent upturn in Singapore’s GDP and a few brave souls might think the good times are here to stay.
The obvious flaw in this argument is that the good times are far from back. And anybody who thinks the kind of structural downturn in trade that has occurred this year will be quickly put right ought to look at the rising US savings rate and ask when the consumer will be coming back to spend.
In Asia the Chinese banks are lending at five-times the level of last year and this has helped to offset the loss of one quarter of Chinese exports over the past eight months. But the slump in GDP around the rest of the world has been dramatic.
Reality check
To say that stock markets have gotten ahead of reality is just to state the blindingly obvious, and older hands have already begun to exit this market.
Some hedge funds have been stocking up on gold and silver as a hedge against inflation or further financial chaos this autumn. For it will not take very much to prick the bubble that this amazing rally has become.
The winners will surely be those who take their long profits and go short in the market. But it is strange how many talk about doing this versus the number who actually do it.
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The Dow Jones Industrial Average rose in all five of the week’s trading sessions, including a 32.12-point gain on Friday to end at 8743.94, up 7.3% for the week. That gain snapped a streak of four weekly losses and was the biggest weekly percentage gain since mid-March, when the average was just beginning a roaring rally off its bear-market lows.
Ed Note: Nice to get a call right for a change! However, the spike could go a bit higher yet.
A big problem for the bearish case is the accelerating leading indicators, especially at the usually accurate Economic Cycle Research Institute. Their Weekly Leading Index is on a tear, at its highest positive rate of change in five years, and they are pounding the table that the recession is over. Their Long Leading Indicator, which does not include stock prices, is extremely strong. See http://seekingalpha.com/article/147472-why-the-recession-is-over and also http://seekingalpha.com/article/143237-bad-news-they-re-just-lagging-indicators.
Perhaps the recession might be over – although I do not think that is true – but then you have to ask is the stock market ahead or behind the curve.
There is no doubt whatsoever that the market is far too optimistic about a strong recovery – and the disappointment will be shown in the traditional fashion – lower stock prices!