Barry Ritholtz: “Buy and Hold” is a Disaster

Thursday, November 26th, 2009

Barry Ritholtz, writer of The Big Picture blog and author of Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy, last week addressed delegates at a CityWire event in Berlin.

According to CityWire, he argued that we were in a secular bear market that began in 2000 and has some years to run. “In secular bear markets, the buy-and-hold approach to investing is a ‘disaster’, he says, citing the experience of 1966-82 in which the Dow Jones Industrial Average went through five strong rallies and ended up back where it started. It’s not all bad news - the current cyclical rally has a few months yet to go with up to 20% upside, based on historical patterns - but will be tough going, Ritholtz warns,” reported the website.

In part two of the interview Ritholtz discusses the state of the US economy, why the US government should have let the banks collapse, and why inflationary fears are misplaced.

Source: Richard Lander, CityWire, November 24, 2009.

Tags: Bad News, Bailout, Barry Ritholtz, Bear Markets, Big Picture, Citywire, Collapse, Delegates, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Easy Money, Event In Berlin, Greed, Rallies, Richard Lander, Secular Bear Market, Us Government, Wall Street, Website Advertisement, World Economy
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Barton Biggs: Better a Pig, than a Bull or a Bear

Saturday, October 10th, 2009

Barton Biggs visits CNBC to discuss the market - Biggs says its better to be a pig in this market, rather than a bull or a bear. Funny thing is Biggs didn’t get to talk about this with Faber - instead they got down to the subject that there is more left in this rebound than investors imagine. The reference to being a pig comes from Biggs’ letters and a recent Newsweek article:

Biggs’ research looked back at past secular bear markets. Investors in past bear markets experienced an average drop from peak of 57% and a recovery from the trough of 78%. In some cases the recoveries from trough were in the 80 and 90 percent ranges. He pointed out further that this time around the drop from peak was 57%, and so far the recovery rally has provided a recovery of 45% out of the trough, hence his optimism that we may be only about halfway to the top of this market rally.
Click play to watch:

Biggs believes there are strong opportunities left in Big Cap Technology, Pharma, and Oil Services - and he believes that China markets will rally strongly again in the 4th quarter, after a lull that began in Mid-June, and emerging markets in general.

“It takes courage to hold fast and be a pig, as they say on Wall Street—my money is where my mouth is.” - Barton Biggs

Biggs thinks we are only half way through this rally:

The market is only about halfway through what is historically typical of a bear-market recovery—and this time around, the rebound is likely to be even bigger, said Barton Biggs of Traxis Partners.

Traxis analyzed 14 past bear markets—ranging from gold to US stocks—and found that when markets dipped more than 40 percent, the average rally off the lows was about 72 percent, he said.

Since the Dow is up only about 45 percent and the S&P about 52 percent, the market still has a lot of room to the upside, Biggs said.

“We’ve had a tremendous, an unbelievable decline in both the economy and the stock market, and so I just think we’re going to have a bigger than normal bounce,” Biggs said. “I just think we’ve got further to go.”

Tags: 4th Quarter, Amp, Barton Biggs, Bear Market, Bear Markets, Bounce, Cap Technology, China, China Markets, Cnbc, Courage, Decline, Dow, Economy, Emerging Markets, Faber, Funny Thing, Gold, Lot, Lows, Lull, Market Rally, Newsweek, Newsweek Article, oil, Oil Services, Optimism, Pig, Rally, Rebound, Stock Market, Stocks, Traxis Partners, Trough, Wall Street
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Is the rally ending, or does it have more to go?

Sunday, September 20th, 2009

This is a guest post by Barry Ritholtz, editor of The Big Picture Blog and author of the popular book, Bailout Nation.

OK, it’s time for round 2, Shedlock vs. Ritholtz.

You may recall that last time, Mish & I disagreed as to whether this was a recession (Me) or a depression (He). This time, the debate is over the current rally.

On Monday this week on Yahoo Tech Ticker, I discussed that we did not see evidence that the rally was ending (see “Rally May Only Be in 6th or 7th Inning, Ritholtz Says“).

Shedlock pens a response - “Rally in 6th Inning or Top of the 12th?” - and discusses the reasons he thinks the market rally should be ending soon: “The flip side of the coin is this market has advanced so far, so fast that if downside momentum does develop, there is nothing but air pockets below. Air pockets are thus a two-way street. If anything, there is far more air below than above.”

That may be. However, none of the various metrics we track suggest the rally is about to run out of gas anytime soon. That doesn’t mean it can’t end to tomorrow, but we would rather play the high probability, rather than low probability outcomes.

Here are the four most important reasons why I think we can have more upside, plus a look at some grim economic realty.

1) Individual investors remain under-invested.

2) Market breadth and momentum are each positive (i.e. supportive of further upside).

3) Sentiment has not yet reached extreme levels.

4) The broader investment community believes - incorrectly in my opinion - that a recovery is upon us, profits are getting better.

5) History shows that secular bear markets have deep selloffs and huge rallies; this current rally still has room to run based upon a composite of prior cycles (see “Four Stages of Secular Bear Markets“).

Now, about that economy. Here is my dirty little secret. FOR TWO THIRDS OF THE TIME, THE ECONOMY REALLY DOES NOT MATTER.

I know that sounds insane, but consider the following: In the middle of secular bull markets, economic info seems to have the greatest correlation with market performance. Good data, more profits, better market action.

At market tops, the economy looks great. Valuations are rich, but record profits support the multiple.

Then it all goes to hell.

At bottoms, it looks awful. It looks like these companies will never make another dime, that layoffs won’t ever end, that we can never escape the tar pit.

And then we do.

This must be perplexing, maddening, infuriating to pure economists. But that is Mr.Market’s job - to frustrate the maximum number of players.

Source: Barry Ritholtz, The Big Picture, September 17, 2009.

Tags: Air Pockets, Bailout, Barry Ritholtz, Bear Markets, Big Picture, Dirty Little Secret, Downside, Extreme Levels, Flip Side, Individual Investors, Investment Community, Market Breadth, Market Rally, Metrics, Momentum, Nothing But Air, Probability, Rallies, Recession, Selloffs
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David Rosenberg: Equities on a roll, but still overvalued

Monday, August 31st, 2009

David Rosenberg, formerly the Chief North American Economist at Merrill Lynch in New York, returned to his native Canada to settle at Toronto-based Gluskin Sheff, following the Bank of America acquisition. He is highly respected and one of the most candid and lucid macro-economists and his grasp of the market related economics is refreshing. Rosenberg says there is no point in making economic forecasts that are not backed up by actionable investment calls. His Breakfast, Lunch, Coffee and Tea With Dave newsletters are worth reading.

Last week, Rosenberg shared his thoughts on the question, “Is the financial crisis over?” (08/25)

Not if you’re not too big to fail. We are now up to 77 failed U.S. banks so far in 2009. This already matches, in just eight months, the number of lenders who failed in the previous 16 years combined.

About bear markets and valuation:

One should always keep an open mind. Practically all bear markets have a 50% retracement and this cycle has been no different. However, what we have witnessed is unprecedented because at no time in the past has the stock market rallied more than 50% ahead of the supposed end of a recession. Normally, the
move off the lows to the official end of the economic downturn is 20%. And, the trailing P/E multiple on operating earnings is now north of 25, a record eight point expansion in a short time frame (the P/E on reported earnings is nearly 130x!).

Go back to the March lows, and the market was down around 60% from the peak,but then again, earnings plunged the same amount. At the lows, valuation levels
suggested that equities were pricing in $50 of operating earnings and -2.5% real GDP growth for 2009. And guess what? That’s exactly what we are likely to get.

What’s priced in five months and 50% later? Call it $70 on operating EPS for the coming year and +4.0% real economic growth. In other words - the stock market is fully priced and then some. But for the time being, the technicals and sentiment - the high level of enthusiasm - and the risk of a “buying panic” by lagging portfolio managers are very likely going to make folks, like Walter Murphy, look prescient.

About last week’s so called good news (08/26):

1. Bernanke reappointed

We really fail to see how it could possibly be that the same central bank official, who, over a span of a decade, presided over two massive bubbles and their busts, can be viewed as being a positive force for the markets. Perhaps there is some solace in knowing that the same person who created this awesome and complex $2 trillion Fed balance sheet will be around to dismantle the largesse since he’s probably the only one that knows how.

2. The first monthly increase in the Case-Shiller home price index

As for the second point, there is a difference between a trendline and the noise around that trendline. Home prices are down a massive 31% from their peak and have been in a vertical-down pattern for nearly three years. Perhaps a respite is in order, but with the true underlying unsold inventory near 12 months’ supply, which is double what would typify a balanced housing market, it would seem like wishful thinking that we have suddenly achieved a fundamental low in residential real estate values (especially at the high end).

3. The seven-point jump in consumer confidence in August

With regard to point number three, we welcome any rise in consumer confidence but an honest appraisal of the data would show that 54.1 is still a very depressed level. In fact, the average index level during recessions is 73.0 - August’s reading was nearly 20 points below that. So, if the recession is indeed over and done, somebody forgot to tell this 70% chunk of GDP otherwise known as the consumer.
Now, what about Mr. Market, who is still in a most joyful mood. Well, the normal level of consumer confidence in the month in which the S&P 500 is up 55% from an oversold bear market low is 100. So, the stock market is behaving as if consumer confidence is twice the level it really is.

What is the enemy of this bear market rally?

The real enemy for the equity market is Mr. Bond - that pesky Treasury market that just won’t sell off and validate the great reflation trade. Indeed, if we were seeing a real asset allocation move on the part of investors, as opposed to massive and ongoing short covering, then the 10-year Treasury note yield would be trading close to 5.0% - especially with these freshly minted Obama debt forecasts. But instead, the 10-year note is now getting perilously close to the July 10 low of 3.32%. Keep in mind that July 10 was the day when Meredith Whitney gave the green light to Goldman, and Roubini declared the recession to be ending, and what a spark that provided to this last leg of the bear market rally. Now what if Doug Kass’ declaration yesterday that the major averages have hit their highs for the year proves as prescient in the other direction? Come on, not only is the market trading at a nutty 130x multiple, but September-October is right around the corner (as is H1N1).

Equities are on a roll… but still overvalued (08/28):

We continue to hear how undervalued the stock market got to this cycle, but it was really the corporate market that was priced for Armageddon. The equity market, at the lows, was discounting -2.5% real GDP, but if it was pricing in the same outlook as corporates, Baa spreads pierced the 600 basis point threshold, then the S&P 500 would have bottomed near 315, not 666. (Hey, that still would have been a triple-bagger from the 1982 lows!)

Be that as it may, what we have on our hands is a liquidity-induced and technically-strong equity market, and as Bob Farrell has been known to say, these types of rallies quite often “go further than you think” but they do not generally correct by “going sideways”. Even if the recession is over, the market usually is up 20% from the time of the bottom to the end of the downturn. By the time we are up over 50% on the S&P 500, what is “normal” is that we are heading into the second year of recovery (recession being over isn’t even a debate), the economy has shown an ability to expand without the need for government assistance and GDP would have risen nearly 5.0% by now and helped create about 1 million jobs. In other words, after the market has jumped over 50% from the low, we have moved beyond hope and into reality.

You can sign up to receive David Rosenberg’s letters by email here.

Tags: Acquisition, American Economist, Bank America, Bank Of America, Bear Markets, Breakfast Lunch, Canada, Candid, Coffee And Tea, Core Beliefs, David Rosenberg, Economic Downturn, Economic Forecasts, Economics, Economists, Eight Months, Five Months, GDP Growth, Gluskin Sheff, Gold, Grasp, Lows, Merrill Lynch, Native Canada, Real Gdp, Recession, Retracement, Stock Market, Technicals, Valuation Levels
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The Secular Bear Market in 4 Stages

Friday, August 28th, 2009

The debate rages on as to whether global stocks markets have turned the corner and are in the early stages of a new secular bull market, or whether we are experiencing a secondary bear market rally (or cyclical bull phase) within a primary bear market.

Although I am not a big proponent of averaging data across multi-year cycles, an analysis of the various stages of a typical secular bear market by Teun Draaisma and the strategy team of Morgan Stanley Europe nevertheless provides food for thought. The chart below shows what a typical secular bear market looks like based on the average of the past 19 major bear markets around the globe.

Considering the aggregate data, the team summarized their findings as follows:

“Each involved a peak-to-trough decline of at least 40% lasting at least a year. The median of these bear markets showed a 57% decline over 30 months.

“The usual rebound rally is 71% over 17 months … Structural bear markets are always followed by a strong rebound, typically from the moment authorities take decisive action.

“A turn in the rate cycle is often the trigger for the next correction. Often the peak in the rebound rally has been around, or prior to, a change in the interest rate cycle.”

“Broad multi-year trading ranges followed the initial rebound in 10 of 19 bear markets. In most cases, structural problems in the real economy acted as a headwind to a new bull market, such as financial bubbles, high debt levels, fiscal deficits, current account deficits, deflation and high inflation.”

Looking at the present situation with the MSCI World Index up by 57.7% and the S&P 500 Index up by 52.4% since the lows of March 9, the Morgan Stanley team concludes: “If the aftermath of these 19 secular bear markets is anything to go by, the current rally could go on a bit longer; is likely to stall a few months before the first Fed rate hike, which we expect in Q3 of 2010 … and is likely to be followed by some sort of trading range for years to come because of the structural problems of financial sector and household deleveraging as well as the poor state of government finances.”

For those interested in the data of the various secular bear markets and subsequent movements, the table below makes for interesting reading.

Click here or on the table below for a larger image.

Source: Teun Draaisma, Ronan Carr, Graham Secker, Edmund Ng and Matthew Garman, Morgan Stanley European Strategy, August 10, 2009 (hat tips: The Big Picture and proshare),  August 27, 2009.

Tags: Account Deficits, Aftermath, Amalgam, Amp, Barry Ritholtz The Big Picture, Bear Markets, Bears, Bull Phase, Cfa, Chart Below Shows, Composite Pattern, Current Market, Debate Rages, Debt Levels, Edmund Ng, Fed Rate Hike, Financial Bubbles, First Fed, Fiscal Deficits, Garman, Global Stocks, Headwind, Interest Rate Cycle, Market Rally, Morgan Stanley, Morgan Stanley Europe, Msci World Index, Rally, Rebound, Ronan, Secker, Secular Bear Market, Secular Bull Market, Snapback, Spx, Strategy Team
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Paul Tudor Jones: This is a “bear market rally”

Tuesday, August 11th, 2009

Hedge fund investing great, Paul Tudor Jones, founder of $10.8-billion Tudor Investment Corp. says the current rally is a “bear market rally,” in his latest letter to investors.

Bloomberg:  Tudor Investment Corp., the $10.8 billion hedge-fund firm run by Paul Tudor Jones, said equity markets could decline later this year, creating buying opportunities.

Slowing growth in China and the return of front-page stories on swine flu may be “further catalysts for global equity markets to pause in September,” the Greenwich, Connecticut-based firm said in an Aug. 3 client letter, a copy of which was obtained by Bloomberg News.

Tudor said the 47 percent gain in the Standard & Poor’s 500 Index of the largest U.S. companies since March 9, when it fell to a 12-year low, is a “bear-market rally.” The index topped 1,000 for the first time in nine months this week after companies reported better-than-expected profits.

“Impressive counter-trend rallies are a feature, not an oddity, of secular bear markets,” Tudor said. “We are not inclined to aggressively chase the market here. Many doubts remain about the sustainability of this recovery, most prominently the weakness of household income growth.”

Read the whole article here.

Source: Bloomberg, August 6, 2009, Saijel Kishan
http://www.bloomberg.com/apps/news?pid=20601087&sid=aRxNALRApIoY

(h/t: Simoleon Sense)

Tags: Amp, Bear Market, Bear Markets, Bloomberg News, Catalysts, Doubts, ETF, Flu, Global Equity Markets, Greenwich Connecticut, Hedge Fund, Household Income Growth, Market Rally, Nine Months, Oddity, Paul Tudor Jones, Rallies, S 500, Simoleon, Sustainability, Swine Flu, Tudor Investment
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More on Bob Farrell’s Rule #8

Monday, August 10th, 2009

I posted “Bob Farrell’s Rules for Investing” a few days ago, and these words of wisdom turned out to be popular reading material.

Given the debate as to as to whether the US stock markets are experiencing a primary (secular) bull market or a rally within a primary bear market, i.e. a so-called cyclical bull market, Farrell’s rule #8 has caused a fair amount of food for thought:

“Bear markets have three stages - (1) sharp down, (2) reflexive rebound and (3) a drawn-out fundamental downtrend.”

In an attempt to put these stages in perspective, David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, provided a graphic illustration of Farrell’s three stages, as shown below.

Click on the image for a larger graph.

Source: Gluskin Sheff & Associates - Lunch with Dave, August 7, 2009.

Whether stock markets will enter a drawn-out downtrend remains to be seen, but given the magnitude of the rebound a pullback certainly looks likely. Caution seems to be in order.

Tags: August 7, Bear Market, Bear Markets, Bob Farrell, Caution, Chief Economist, David Rosenberg, Food For Thought, Gluskin Sheff, Graph, Graphic Illustration, Magnitude, Pullback, Reading Material, Rebound, Reflexive, Secular Bull Market, Strategist, Us Stock Markets, Words Of Wisdom
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Richard Russell (Dow Theory Letters): Characteristics of secondary reactions

Monday, May 25th, 2009

Richard Russell, author of Dow Theory Letters, offers wisdom on price movements, explaining the nature of upside moves, particularly, bear market rallies.

“The most difficult and puzzling study of the stock market is that which deals with secondary reactions against the primary trend. Because we’re in a bear market, I’m going to limit the following discussion to (upward) reactions in bear markets.

“Over the weekend I pulled out my volume of Robert Rhea’s ‘The Dow Theory’. I went over some of Rhea’s comments on secondary reaction in bear market.

“‘For the purpose of this discussion, a secondary reaction is considered to be an important advance in a bear market, usually lasting three weeks to as many months, during which interval the price movement generally retraces from 33% to 66% of the primary price change since the last preceding secondary reaction.

“‘Those who try to place exact limits on secondary reactions are doomed to failure, just as surely as would be the weather man who forecasted a snowfall of exactly three and one half inches within a specified time.

“‘In a bear market steady liquidation of securities by those who prefer or need cash reduces quotations day after day, with professionals, realizing there is more room on the bottom than on the top, hastening the decline with short sales. Eventually, the market is forced to a lower level than is warranted by conditions. The short interest is perhaps too extended, with wise traders sensing the fact the liquidation has, for the time, at least, run its course.

“‘Quiet, weak spots in bear markets are generally good ones to short, as they generally develop into serious declines.

“‘In a primary bear market the rallies are apt to be violent and erratic, and always occupy less time than the decline, which they partially recovery. Often the primary movement of several weeks is retracted in a few days.

“‘Rallies in a bear market are sharp, but experienced traders wisely put out their shorts again when the market becomes dull after a recovery.

“‘In bear markets, primary movement has an average duration of 95.6 days, whereas the secondary movement averages 66.5 days or 69.6% of the time consumed in the preceding primary movements.’

“All the above pertains to the price action during rallies in bear markets. But what about business conditions during bear market rallies? My studies show that bear market rallies are technical phenomenons which do not necessarily reflect on business. I’m looking at a chart of the great 1929 to 1930 rally which occurred after the 1929 crash. The Federal Reserve Index turned down in late-1929, and despite the great bear market rally, the Fed Index continued lower into early 1932.”

Source: Richard Russell, Dow Theory Letters, May 18, 2009.

Hat tip: Investment Postcards

Tags: Bear Market, Bear Markets, Decline, Declines, Dow Theory Letters, Exact Limits, Failure, Few Days, Interval, Liquidation, Market Rallies, Nature, Quotations, Rallies, Richard Russell Dow Theory, Robert Rhea, Short Interest, Snowfall, Stock Market, Weather Man, wisdom
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Hussman: Banks Pass Stress Tests, Regulators Fail Ethics Test

Monday, May 11th, 2009

The following article is an excerpt from John Hussman’s Weekly Market Comment, Hussman Funds.

May 11, 2009 - Just a performance note – on Wednesday and Friday, we observed normal pullbacks in a large number of our top holdings, all well within their recent trading ranges. However, this was coupled with frantic short-covering in financials, which drove the S&P 500 higher at the same time our holdings were pulling back. This gap in performance between stocks that we own and stocks that we don’t own (but are still in the indices we use to hedge) is known as a “basis widening.” These generally leave us feeling like we’ve been on the rack in a Medeival dungeon. But we’ve seen these before, and they often reverse themselves over the course of a few days or weeks. The main factor to note is that the pullbacks across our largest holdings have been run-of-the-mill. The driving factor was the short squeeze in financials on the notion that the stress tests were an “all clear” signal. The modest “anti-hedge” we have in index calls was not sufficient to offset the spike in financial companies, many which remain nearly insolvent.

With regard to the recent market advance, as I noted in the December 15, 2008 comment (Recognition, Fear and Revulsion):

“While we’ve seen a good deal of fear, the stock market tends to go through a great deal of sideways action after panics like we’ve observed. It’s likely that stocks will trade in a very wide 25-35% range for months. We have to be particularly observant as stocks approach the higher end of that range.

“Bear markets tend to experience a series of separate lows on what I’d call recognition, fear, and revulsion. The first selloff of a bear market is on “recognition” – the growing awareness among investors that “boom” economic conditions are in question. Investors generally continue to deny the likelihood of a bear market or a recession, so the phrase “healthy correction” usually comes up a lot. Unlike true “healthy corrections,” however, these periods tend to begin from untenable valuations, overbought conditions, generally rising interest rates, and deteriorating market internals.

To read the complete note, click here.

Source: John Hussman, Hussman Funds, May 11, 2009

Hat tip: Investment Postcards

Tags: Bear Market, Bear Markets, Clear Signal, Economic Conditions, Gap, Hussman Funds, John Hussman, Lows, Market Advance, Panics, Performance Note, Pullbacks, Recession, Revulsion, Selloff, Short Covering, Short squeeze, Sideways Action, Stock Market, Stress Tests
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Overbought Bear Market Rally or New Bull?

Tuesday, May 5th, 2009

Are we in a mother of a bear market rally, and is the market overbought? Or is this 1982, or better yet, 1974 all over again, and as some are suggesting, the beginning of a new bull? Several ideas below are worthy of debate at this time.

First, investor sentiment seems to have rebounded far too quickly, considering the absence of strong indications that the economy is recovering, and quantitative easing moves have failed to re-ignite lending so far. Second, winning streaks this long are rare. Third, it appears that according to breadth measures, the market is in an overbought state. Is it different this time, or is it the topping out of a large sucker rally? Has the market just chosen to forget that there are still widespread problems in the banking systems of the US, Japan, Europe and the UK?

Sentiment may have changed too quickly, a characteristic of past bear market rallies.

“I’ve lived through a lot of bear markets, and I must say I’ve never seen sentiment change so quickly after an horrendous drop in the market.” So wrote Richard Russell, editor of Dow Theory Letters, after the close on Monday, following yet another impressive day for stocks, in which the Dow Jones Industrial Average tacked on another 214 pts,” writes Mark Hulbert for Marketwatch.com.

Winning streaks this long are quite rare for markets.

With the Nasdaq Composite index working on its 9th consecutive positive week, many are curious about just how unusual this is.

I’m not a huge fan of “streaking” in and of itself to try to determine when a trend might exhaust, but it can be quite useful in helping to time shorter-term entries and exits.  For example, if the S&P is up 5 weeks in a row and then it gaps up +0.5% one morning, that can give us a better edge than not knowing where we are in the streak.

Anyway, the tables below give the number of weekly streaks for the S&P 500, Nasdaq Composite and Dow Jones Industrial Average since the dates given under each index.  There is an interesting wrinkle that becomes evident very quickly.

The current stretch of 9 weeks (maybe) for the Nas would be pretty unusual, but not unheard-of.  12 other periods went for this long or longer since ‘71.

We can see from that tables that the “down” weeks one is quite a bit shorter, and is much more heavily weighted at 1 and 2 weeks.  This shouldn’t be too much of a surprise, but it means that the market is less likely (or has been less likely, anyway) to stage long stretches of down weeks without an interruption.  Those bulls just get way too antsy and need to jump in.

Also interesting is the streakiness of the Nasdaq compared to the others.  It’s more heavily weighted towards the longer streaks, and has the record for both up and down stretches.  The suggestion from that would be that some higher-beta indices like the Nasdaq are more prone to trends than are the more-staid indexes that are used far more for benchmarking purposes.

Breadth measures suggest the market is overbought.

Quantifiable Edges says “I’m seeing some breadth measures again hitting all-time extremes. Worden Bros. measures the % of stocks trading at least 1 and 2 standard deviations above their 40-day moving average. I mentioned the 1-standard deviation indicator (T2110) in the blog a couple of weeks ago. At the time it was hitting an all-time high of nearly 81%. Tonight it broke that record registering over 83%. The number of stocks closing 2-standard deviations above their 40-day ma (T2112) also hit a new extreme Monday - and in a big way. Before Monday this indicator had never reached 40%. Monday it spiked up to 52.14%. A chart with the complete history is below.”

“This suggests the market is incredibly overbought. As I went over a couple of weeks ago, this doesn’t necessarily mean we’ll see a sharp selloff. At such incredible levels, though I’d certainly be careful taking long positions. These overbought levels will be worked off at some point. A selloff is one way to accomplish that.”

Barry Ritholtz offers this view:

Over the past month, I have heard quite a few people declare this to be the start of a new bull market. The kindest thing I can say in response to that is the jury is still out, but the weight of the evidence is inconclusive.

In terms of historical analogies, investors should be asking themselves: Is this move more like 1982 or 1974?

Consider: 1982 marked the end of a 16 year, secular bear market, which saw the Dow finally get over 1,000 on a permanent basis. It kissed that level in 1966, and again a few more times prior to breaching that level for good in 1982. After 16 years, nominal returns were zero, but on a real (inflation adjusted) basis, buy & hold investors lost nearly 90% of the purchasing power.

At the beginning of that 18 year long Bull market, equities were despised, bond yields were high and P/E ratios were single digits. History does not repeat precisely, but there is usually a rhyme involved.

I have noted in the past that following major bull runs, markets often have a major refractory period, wherein it takes years to work off the excesses of the prior period. Even in that period, markets will get deeply oversold and rally, and deeply overbought and sell off.The current secular bear is no different.

This could be 1982, but I doubt it. Instead, consider the 1973-76 period as a analog: The 23 month, 45% sell off was followed by 22 month, 76% rally. I could live through that again, as long as disco doesn’t come back also . . .

I’ll see if I can dig up a few relevant charts later.

And, Corey Rosenbloom at GreenFaucet.com puts forward his argument, Are we Reliving the1982 Scenario?

Could history be repeating itself directly?  Might there be an exact roadmap to follow as it relates to the current stock market trajectory?  If only it were so easy, but I did want to highlight some eerie similarities in the charts you might want to as it relates to the end of the 1982 Bear Market in what was called the “Melt-Up” action.  Let’s take a look and see if we might be reliving the “1982 Melt-Up Scenario”.

First, let’s take a look at our current market structure as of May 4th, 2009:

Taking a quick look, we see a negative volume divergence accompanying a negative momentum divergence (shown in the 3/10 Oscillator and in other momentum oscillators).  Divergences are non-confirmations of higher prices and hint that odds favor a reversal (or at least a retracement) rather than immediate continuation of the rising price action.

A geometric ‘arc’ has also formed, which hints at a gentle transfer between buyers and sellers (supply and demand) - also a reversal/retracement signal.

Next, let’s look at an eerily similar pattern that formed as we hit the absolute lows of the 1982 Bear Market:

We can apply the same analysis - rounded arc, negative volume and momentum divergences.  In the case of September 1982, we did see a much larger volume and momentum spike than we’re seeing now.  Price had broken down out of a rising trendline and beneath the 20 day exponential moving average (all charts are showing the 20 and 50 exponential average as well as the 200 day simple moving average).

Speaking in terms of visual charting or technical analysis, virtually any market forecast would have returned a bearish implication from the negative divergences combined with the trendline and moving average break, and the persistent downward trend in prices.

But what happened just after I captured this chart?

Finally, here is the resolution of the pattern and what happened afterwards.

Much to the surprise to both technical and fundamental analysts, investors, and traders, price completely  shrugged-off the negative technical and fundamental analyses and rallied quite sharply - most likely in response to the persistent negativity, as funds who were short were forced to cover and equity funds who were in cash rushed to chase alpha buy putting cash to work, not wanting to ‘miss the boat.’

Price continued higher with nary a meaningful retracement at all (finding support each time at the rising 20 day EMA) despite further weakness in the momentum oscillator and in volume.

If I extended the chart further to the right, you would see price continue its steady trek higher, rising persistently into August 1983 before any meaningful pullback occurred.  We often refer to this period as the “Market Melt-Up” (as opposed to a melt-down) or as the “Creeping/Oozing Trend Up” that continued to defy the bears (sellers).

We’ll need to do more analysis to draw further parallels, so one might do well to turn back your charts to 1982 and see if the current S&P 500 continues to behave in the manner it did almost 30 years ago.  It might be an eerie coincidence, but there may also be something deeper of value to consider in the price structure parallels of then and now.

Finally, after reading Corey Rosenbloom’s discussion, one counterpoint arose to his argument, that being that the US prime lending rate in 1981 had topped at 20.5%, and in the period thereafter, interest rates began their return to normal levels over many years. Today, we are faced with an empty monetary tool box and trillions of dollars in Quantitative and Credit Easing - an altogether different set of circumstances, i.e. fully tightened in 1982 vs. fully eased in 2009. Today’s pretext is deflationary, not inflationary. And, worse, there appears to be a lot of hope, for hope’s sake, that the worst of the problems of the banking sector are behind us. Are they?

To wit, stocks are not yet quite among the despised of assets, they are not yet in the single digit P/Es yet, and government bond yields are at historic lows. Where is the rhyme with either of 1982 or 1973-74?

The charts sure are interesting, and perhaps in some cases they do rhyme, or show high correlation to past markets, however, they remain inconclusive.

To reiterate Barry Ritholtz, the jury is still out. You decide.

Tags: Amp, Banking Systems, Bear Market, Bear Markets, Breadth, Different This Time, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Dow Theory Letters, Gaps, Investor Sentiment, Mark Hulbert, Market Rallies, Market Rally, Nasdaq Composite Index, Periods, Quantitative Easing, Richard Russell, Stocks, Streaking, Sucker, Term Entries, Winning Streaks
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Picture du Jour: Stock markets – it’s all about confidence

Tuesday, May 5th, 2009

A key requirement for the recent stock market gains to be more enduring and for the bear’s corpse to be put to rest, is the restoration of investor confidence. A few comments regarding this issue are highlighted in this post.

As shown in Sunday’s “Words from the Wise” review, a confidence indicator worth monitoring is the Barron’s Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. There has been a solid improvement in the ratio since its all-time low in December, showing that bond investors are growing more confident and have started opting for more speculative bonds over high-grade bonds.

Not surprisingly, a strong historical relationship exists between the Barron’s Confidence Index and the S&P 500 Index’s 12-month rate of change.

Click on the image below for a larger graph.

The improvement in the Barron’s indicator augers well for the outlook for equities - specifically for the return of confidence - and provides further evidence that US stock markets are mapping out a base development formation. The early January highs and 200 day-moving averages are the next important targets and a break above these levels would signal the completion of the base formation and a secular bottom (as has already been seen in leading markets such as China and Brazil). (The Nasdaq Composite Index is also already above its January high and 200-day line.) Meanwhile, the speed and magnitude of the rally argue for markets to consolidate and possibly retrace some of the past eight weeks’ gains prior to launching an attack on longer-term indicators used to distinguish between primary bull and bear markets .

Tags: Amp, Barron, Bear Markets, Bond Investors, Bonds, Bull And Bear, Confidence Index, Confidence Indicator, Corpse, Discrepancy, Graph, Investor Confidence, Magnitude, Moving Averages, Nasdaq Composite Index, Nasdaq Index, Rally, Stock Market Gains, Stock Markets, Targets, Term Indicators
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Nouriel Roubini: A night with the Bears

Saturday, April 18th, 2009

A big bear: Markets ‘way too optimistic’

Nouriel Roubini, from NYU and founder of RGE Monitor presents the keynote speech at A Night with the Bears. The other guest speakers at the event hosted by Sprott Asset Management, held in Toronto last week included Meredith Whitney, and Ian Gordon, and Eric Sprott.

The accompanying article from the Globe and Mail can be read here.

Tags: April, Asset Management, Bear Markets, Bears, Big Bear, Canada, Dr Doom, Eric Sprott, Event Management, Globe And Mail, Globe Mail, Guest Speakers, Keynote Speech, Long Dark Night, Meredith Whitney, Night Mail, Nouriel Roubini, Nyu, Roubini, Toronto
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