Is the tide turning for stocks?
I posed the following question a few days ago: “Does the stock market rally have legs?” We have now had four days in a row of a higher market, something we have not seen since June this year. This is also the S&P 500 Index’s biggest four-day surge (+18.0%) since 1933.
A sharply weaker opening yesterday as a result of a barrage of gloomy economic reports was followed by a reversal on the news of former Fed Chairman Paul Volcker’s appointment to a new White House Economic Recovery Advisory Board tasked to revive growth in the US. Involving the 81-year Volcker in this way is a smart move by President-elect Obama.
The table below shows the performances of various global stock markets over the past four trading days, as well as figures since the respective markets’ highs and for the year to date (all in local currency terms).
Click on the table for a larger image.
The gains of the various US stock market sectors since the November 20 lows make for interesting reading, with previous laggards such as financials, consumer discretionary, energy and materials showing the defensive sectors (health care, utilities and consumer staples) a clean pair of heels.
Interestingly, according to Bloomberg, Société Générale global equity strategist James Montier said he’s never been so bullish after the financial crisis dragged down prices of stocks, corporate bonds and inflation-protected government debt.
“This is a value investor’s version of heaven. From a bottom-up perspective, the equity market is offering some excellent companies at truly bargain prices for those with the fortitude to shut their eyes, or at least switch off their screens and buy.
“With all of these opportunities available I have never been more bullish! Will I be early? Almost certainly yes, but if I can find assets with attractive returns and I have a long time horizon I would be mad to turn them down.”
Barton Biggs of Traxis Partners, according to the Financial Times, said: “I have no idea when the next bull market starts, but I do think we are setting up for the mother of all bear market rallies.” He motivates this viewpoint as follows:
• “Stocks around the world are very cheap.”
• “Stock markets have been obliterated and are deeply oversold.”
• “The fabric for economic healing is developing.”
• “We must be pretty close to maximum bearishness.”
On the last bullet, Investors Intelligence points out that its sentiment indicator has improved from its historical mid-October low of -32.2% (i.e. percentage bearish advisors less percentage bullish advisors) to -15.1% – still signaling low risk to accumulate shares.
Another important development regarding sentiment is the fact that the CBOE Volatility Index (VIX) is threatening to drop below its 50-day moving average for the first time in almost three months. Given the inverse relationship between the VIX and stocks, this is good news for equity bulls.
Should the bullish seasonal tendencies hold true on this occasion, possible first targets are the November 4 highs of 9,625 for the Dow and 1,006 for the S&P 500. This will also result in both indices clearing their 50-day moving averages (see my post “Does the stock market rally have legs?” for a summary table of the key levels).
The question remains: have we seen an important turn to the upside? According to Richard Russell (Dow Theory Letters) we’ve had ten 90% down-days since September, followed by a 90% up-day on November 24. If the tide is in the process of turning up, we should now see a series of strong sessions. I will be keeping a close eye on market breadth in particular.
Although there is as yet little evidence that we are leaving the corpse of the bear behind (especially with Q4 earnings disasters looming in January), it would appear that the nascent rally could have more steam left.
All that remains is to say a big thank you to my readers for your support and friendship and wish you a joyous Thanksgiving!
Source: VosieSales
November 27th, 2008 at 10:13 am
There are too many bankers. If they are bailed out now, they will still be in trouble in the future. The bailout cash should be spent on consumers and small business investors.
Print cash and mail out $5 000 to $10 000 to all taxpayers who filed (or all who filed and also vote? Or send it first to voters).
November 27th, 2008 at 10:38 am
I may be too stuck on analogies, but I still think we may be in a period analogous to that of November 1929 when the DJ was down a little less than 50%.
While we have had tremendous volatility, some of it was due to modern inventions like programmed trading and hedge funds. There was also tremendous volatility at that time. The third biggest percentage gain in the history of the DJ was on Oct. 30, 1929. A bear market rally started with the 10th biggest gain on Nov. 15. The rally lasted til April of 1930 and carried the average up 50% from that point.
http://www.mdleasing.com/djia-losses.htm
After that, it rolled over and completed its drop of 90% overall.
However, I remain open to being convinced otherwise.
In a slightly different vein, John Mauldin’s Thanksgiving newsletter (free if you give him your email), has an thought that might give goldbugs pause. It is the opposite of Dr. Doom’s prediction:
“Yesterday the Treasury announced yet another huge $800 billion bailout, but this one has a different flavor. Much of the previous bailout money has come from the Treasury either borrowing money and buying assets (which does not create new dollars) or simply taking assets onto the national balance sheet, guaranteeing the debt. With this latest move, the Fed is going to buy $600 billion in mortgage bonds by monetizing, or creating, new dollars.
Normally this would set off more alarm bells, over worries about inflation. But these are not normal times. With the twin bubbles of the credit and housing crises still imploding, we are seeing a massive deleveraging and the disappearance of multiple trillions of dollars from consumers and businesses. And the bond market clearly expects more softening and maybe even deflation. The 10-year bond is below 3%. I wrote 10 years ago that we could see the 30-year US bond below 3% by the end of this decades-long cycle, which we began in the early ’80s with Paul Volker.
As I wrote last April, the velocity of money (how fast a dollar moves through the economy) is slowing rather dramatically. It could fall another 10% and just get back to the average for the last 107 years. Given the growth in population, inflation, productivity, and other factors, the money supply will need to grow by 7% annually for the next several years to keep the economy at equilibrium. Remember, GDP (gross domestic product) is essentially the velocity of money times the supply of money. If the velocity slows down, the money supply needs to rise just to stay even.
The Fed is going to have some room to pump up the money supply without seeing inflation rise precipitously. I think this is the first of what will be several large injections, as they will keep it up until the economy begins to recover. They will especially do more if it looks like we could roll over into a deflationary environment next year. I will be writing more about this in the coming months. ”
http://frontlinethoughts.com/gateway.asp
November 27th, 2008 at 11:06 am
I read somewhere in the journal that the expected mass layoffs to be announced was huge. Employers traditionally wait until after the holidays to announce the mass layoffs.
IMHO, we’re having a nice santa clause rally on the back of hope and liquidity, but wait until the layoff announcments start to pick up in January. Down she goes.
Mish and David Rosenberg have it right. Unless the Fed plans to reflate another 10T, we’ll be right back in deflation mode – at least one more good shot for another 6 months. Another factor to the downside could be reduced appetite for U.S. debt by our foreign overlords – which would surely bring more uncertainty and panic as the ponzi scheme starts to collapse from it’s own weight.
November 27th, 2008 at 11:14 am
Yes, the tide has turned. But what the flood tide bringeth, the ebb tide taketh away. And unlike ocean tides, there is no schedule for the changing of the stock market tides.
November 27th, 2008 at 12:23 pm
Living on the coast, I relate to KJ Foehr’s tide analogy and will add to it: If investors are swimmers, they are facing the most powerful rip current they have ever seen.
Experienced ocean swimmers know not to submit to the urge to swim in a panic straight for the shore. They also know not to ride the current either, because it will take them further out to sea.
The correct strategy, for the greatest chance of survival, is to do neither — the swimmer should swim in a 45-degree angle to the shore, which offers less resistance to the rip current…
“There is only one side to the stock market; and it is not the bull side or the bear side, but the right side.” ~ Jesse Livermore
“The resistance to the unpleasant situation is the root of all suffering.” ~ Ram Dass
November 27th, 2008 at 12:34 pm
“The correct strategy, for the greatest chance of survival, is to do neither — the swimmer should swim in a 45-degree angle to the shore, which offers less resistance to the rip current…”
Although an interestingly profound statement. What am I to do, buy, hold or sell?
November 27th, 2008 at 11:49 pm
This market is not cheap.
The dividend yield is the only income you can count on from a share of common stock – at least until the dividend gets cut or eliminated. Historically, a large portion – over 60% – of the compounded total return from common stocks has been from the dividend. If you think the right time to buy stocks is when the dividend yield is high, then I agree with you. Conversely, buying when the dividend yield is low offers reduced reward at high risk.
Dividend yields of the stocks in the S&P 500 index have been below the historical average since 1985, and at or below the range of historic minimums since about 1993. Before then, the lowest yields ever recorded were about 2.7%. Since bottoming out at a ridiculous 1.14% in 1999, yields have been slowly creeping upwards, and are now approaching the 3% range.
This is still in the range of historical market tops. For fifteen years or so, stocks have been trading at values that are outside of the entire previous historical range.
Though there will be plenty of opportunities for agile traders, I won’t get excited about stocks as a value proposition until I see double 6’s: P/E below 6, and S&P div yield above 6%.
November 28th, 2008 at 12:04 am
Seems that ignoring bad news is a sign of a rally. Japan is experiencing it also.
CNBC reports tonight about news from Japan:
“Industrial output fell 3.1 percent in the month of October, more than a median market forecast for a 2.5 percent drop, and the outlook was for a record fall of 6.4 percent in November — pointing towards an 8.6 percent contraction for the fourth quarter.”
This should have been disastrous for the market. Yet, the Japanese market turned positive after early weakness and is now up. Not a lot, but still up.
November 28th, 2008 at 12:27 am
I have never thought of Barton Biggs as a seer…sorry.
Hiking in the mountains today. Passed quite a few “For sale by Auction” signs that are unusual for this area…
November 28th, 2008 at 9:41 am
Agree w/Bruce, when will we stop quoting Biggs?
November 28th, 2008 at 1:22 pm
@ Bruce in TN —
“… we are seeing a massive deleveraging and the disappearance of multiple trillions of dollars from consumers and businesses”
Do you know of any hard data that supports this? While I readily admit that it FEELS like that, and the equities markets have certainly lost some trillions of dollars, from my vantage point (way far away from the action) it appears that the Fed+Treasury are MORE THAN compensating for these losses — at least in monetary terms — with truckloads of new debt.
This strikes me as more leveraging, not de-leveraging.
I ask because I see this meme of de-leveraging everywhere, but have yet to see any hard data to support it. All the hard data that I see instead tells the opposite story, that we are debt-leveraging our hearts out trying to keep the boat afloat.
Until we start throwing some of the passengers (GM, Freddie, Fannie, AIG, ,,, ) and their debt-laden baggage over the rail, the boat is going to continue to sink.
I’d really like to believe, I’ve been clicking my heels together and repeating “there’s no place like home” over and over again, and if you can point to any quantitative data that shows actual de-leveraging in progress, I would dearly appreciate it. You might have to ’splain it to me in small words that a young child will understand. My sanity may depend upon it.
November 28th, 2008 at 1:24 pm
Perhaps the answer lies in the housing markets, and the crumbling prices/valuations therein. If you take ALL of the homes in America, and whack off 20% or so, there might be some de-leveraging going on.
Can some numerically talented person/quant put together a chart that shows this battle between leveraging and de-leveraging?
Barry?
November 28th, 2008 at 1:44 pm
I’m just trying to get a handle on the relationship between leverage and debt.
Kinda embarrassing, as I use it every day.
I would tend to think of de-leveraging as paying down my credit card bills, or buying less “stuff”.
But it seems to me that we are taking out a 2nd/3rd/4th/5th/ … mortgage on our nation, to pay the interest on some bad “stuff” that we bought that is now broken with no warranty. The value of the “stuff” is falling rapidly, and we are using our new debt to buy paint for the car up on blocks in our yard.
The way that I see us de-leveraging is to haul the junk to the junkyard, and pay down the still-outstanding loan on it (or file personal bankruptcy) and get on with our lives. But that’s not what I see happening.
November 28th, 2008 at 3:19 pm
@ constantnormal
Good point and excellent visual image: “we are using our new debt to buy paint for the car up on blocks in our yard.”
It does seem that way, but, I think what they are trying to do in addition to shoring up failed corporations and asset prices is reflate the economy to stimulate demand, slow the fall of GDP, the rise of unemployment, and stave off deflation.
Whether this approach is ultimately right or wrong, I really don’t know. But I am becoming more sympathetic to the libertarian view of letting it all fall down and rebuilding anew. However, the political reality here, and everywhere else in the world, is that collapse and rebuilding is too painful, and it would not be tolerated by people without serious repercussions such as “throwing the bums out” in the next election here and perhaps a revolution in places like China.
It increasingly seems to me that the only possible outcome of such endless bailouts and borrowing will be a continual erosion in the value of the dollar and very high inflation – as many here have been saying for a long time. But that probably won’t happen until after this recession is over. It will be then that TROW will begin to realize the US is technically bankrupt and will shun the USD and our Treasuries.
November 28th, 2008 at 3:41 pm
@ KJ Foehr
I agree with everything you’ve said, but I still don’t see anything that tells me how this is “de-leveraging”.
Sure looks to me that they are trying to leverage their way out of this mess. It may well be that no matter which way we go, all roads lead to the “all fall down” exit.
Kinda like bleeding the anemia patient.
I am intensely eager to see what kind of medicine Dr Volcker prescribes for this patient. These other yokels (Paulson, Bernanke) I have come to regard as witch doctors or worse (Congress).
November 28th, 2008 at 4:06 pm
Let me be more clear — for de-leveraging to occur, debt must be disappearing faster than value is shrinking. Yet bad debt is being exchanged for (so-called) “good debt” and the values are still shrinking at a very rapid clip. Sure looks to me like we are putting more debt into the mix to try and keep a shrinking economy from shrinking.
We need to allow the economy to shrink back to realistic operational levels, not try it maintain it at levels that we cannot actually manage to support. It WILL shrink, no amount of injected debt can prevent this from happening. The people will refuse to borrow, refuse to consume excessively, the banks will refuse to lend, and the companies that should expire and allow opportunities to emerge in the economy for new companies to replace them will instead wallow in their markets, supported by government bailouts and blocking more efficient companies from thriving — this is the path that Japan took and was so derided for taking.
Just look a what is happening in the mortgage industry — the smaller and regional lenders that were doing a good job are now being forced to compete with behemoths that are incapable of competing otherwise, but are subsidized by enormous amounts of government bailout money, money that is ultimately borrowed and placing a burden upon all companies and individuals in the nation.
We have processes to manage the deconstruction of failed economic enterprises — it’s called bankruptcy. The processes we have are designed to realize the losses, and clear the books of the debts associated with the failed entities. The only alternative that I can see to de-leveraging in this manner is to somehow manage to expand the valuations while maintaining the prior debt levels or decreasing them. And that is simply not happening.
Am I nuts, or are all the people claiming that we are de-leveraging misusing the term?
It must be that I am nuts, as there are a number of people who know more about this than I do who are claiming that we are de-leveraging. Perhaps this Christmas season we shall see some actual de-leveraging, as people actually buy less, but I know of no hard numbers (yet) to indicate that this is happening. And people have been banging the “de-leveraging” drum for many months now.
I would like someone to explain this to me and cure my mental fogginess (a tall order, I know — I would also like a pony for Christmas, and not this large pile of manure, so please don’t try and fool me by handing me a shovel and telling me that there’s a pony inside!).
November 28th, 2008 at 4:13 pm
@ Bruce in Tn — my apologies, I misidentified the phrase “… we are seeing a massive deleveraging and the disappearance of multiple trillions of dollars from consumers and businesses” to your post, and not to Mike in Nola’s — I guess I need a bigger display, so that I don’t have to keep scrolling back & forth at the same time that the display is being rewritten across my tin-can+string innertube connection. Or better yet, multiple displays, so I can fix the post I’m trying to respond to in one screen while typing in another.
My bad.
November 28th, 2008 at 11:20 pm
Constantnormal.
It is ok…I got some great pictures of snow geese today, and one of my builder’s sons killed a wild boar on the place today….pretty good thanksgiving.
I think the population (insert taxpayers) is trying to “deleverage” and I think the only institution right now trying to releverage is the treasury…and I personally think it has gone too far, and that Japanization is a real possibility…
That is why I am buying short term cd’s…if we go into deflation I will make money, and if it becomes obvious the fed is leading us down the inflation trail, I will have time to buy inflation instruments….
Man, I should have moved here right out of graduate school…