New York Times on Bear Market Rallies
By Barry Ritholtz - April 10th, 2009, 12:01PM
I participated in a NYT debate about Bear Market rallies today:
The Dow Jones industrial average gained 246 points on Thursday. The Standard & Poor’s 500 index has now risen more than 25 percent since stocks bottomed out on March 9, one of its best runs since the Great Depression.
This run-up appears to be a classic bear market rally. Do such rallies indicate anything more than investors desperate to find good news anywhere? Or do they suggest a real return of confidence?
Its a short excerpt; the full version of my part runs here on Sunday . . .
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Source:
Bear Market Rally: What Does It Mean?
NYT, April 10, 2009, 11:27 am
http://roomfordebate.blogs.nytimes.com/2009/04/10/bear-market-rally-what-does-it-mean/
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April 10th, 2009 at 12:10 pm
Sell ‘em.
April 10th, 2009 at 12:12 pm
I can’t resist….
The rally is a real thing, at least given current expectations. It’s not a real return of confidence however, unless what you mean by confidence is the expectation that things will not continue to get worse or much worse.
April 10th, 2009 at 12:18 pm
Maybe I’m nuts, but I’m hoping and expecting the rally to continue till the end of May when people sell and go away. We might also go up the first couple days in June, so that’s when I’ll be putting in tight trailing stops – and hoping we don’t have a big huge monstrous gap down the next day!
April 10th, 2009 at 12:30 pm
NYT stories on the market doing incredibly badly have often been closely followed by rallies. Likewise, NYT stories on market rallies are often contrarian indicators that precede selling. I agree the rally was a real thing. But I have scaled back my risk severely since the Kass/Ritholtz/Leftback Bottom at 666.79.
There seem to be two schools of thought among smart market watchers here : 1) Q1 earnings disappointments accumulate and trigger a sharp pull-back here and retest of 750 and/or 666 before reversing upwards. or 2) we have a mid-rally correction of 7-10% and then proceed higher into May with a potential to tag the 200DMA somewhere in the SPX 950-1000 range. I can see both arguments, but I favor the latter. The W-shaped recovery in the economy will stall next winter, and the market anticipates this by selling SPX 975 in May.
In both views, we will sell in May and go away. The July earnings season will show that the Q2 recovery was tepid at best (how can it be otherwise?) and then we will see a steady drip down to an apathetic market bottom. The 1974 action where the market went down every day for months springs to mind. How low the market falls depends to some extent on the results of the reflationary interventions. Energy and materials are likely to outperform anything that depends upon consumer credit.
April 10th, 2009 at 12:39 pm
This current rally has been the best of this bear market, that is hard to ignore:
http://moneyneversleepsblog.blogspot.com/2009/04/bulls-on-parade.html
Many people have been very quick to write this off as another bear market rally which makes you take another look and say what if this is for real? If New York Times is all over this you have to wonder…
April 10th, 2009 at 1:13 pm
I have to believe it is a bear market rally. For 100 straight trading days, QQQQ volume has beaten its own 100 day MA maybe 5 times. The II Bullish Survey has hit this level of bullishness only 3 other times since the meltdown began…October 07, May 08 and Jan 09. All 3 were disastrous times to enter the market. Seasonality is about to turn negative and, yes, the 21 day put call at .83 is the lowest seen since the crisis began.
April 10th, 2009 at 1:14 pm
Who knows. That we haven’t seen a rally like this since the GD begs yet another comparison with the GD, so that in itself is cause for concern. Unlike the GD, we have unprecedented government inervention with the fed goosing bond market and very possibly stock market. If that’s the case, then we have probably seen the bottom in nominal terms- 666. I’m beginning to speculate that they are putting a bid under the stock market as well as the bond market in order to prevent an implosion of pension funds. Perhaps it is cheaper in the long run to bid up the markets now than to bail out the pension funds in the future. Perhaps I’m too hopeful that they are so foresighted…
April 10th, 2009 at 1:19 pm
It’s temporary. Earnings season has just begun and it will be abysmal – although I’m sure financials will look better than expected thanks to OG (Obama-Geithner) propping up bnaks and allowing them to falsify their accounting.
April 10th, 2009 at 1:32 pm
At this point it has to be pretty difficult for earnings to be worse than expected. Banks have got wide spreads and better be able to kill it on that side for the time being. The trading side should be decent as well for March at a minimum.
LA Times also picked up on the bear market rally theme in addition to NY Times, it is becoming way too trendy to be negative and doom and gloom now. Being on the same side as all of the other cool kids when it comes to the markets is a very uncomfortable position and usually doesn’t end well… Something to think about.
http://moneyneversleepsblog.blogspot.com/2009/04/bear-market-rally-thesis-gains.html
April 10th, 2009 at 1:45 pm
Forgot to add, bidding up the market may also prevent a variety of other shoes from dropping. God knows how may CDS contracts would be triggered if the market fell below 600, for example. (How may of us know what’s in those things?) If further losses in the stock market are believed to present “systemic risk”, then you can be sure that they are putting a bid under it. This leads to the question, when do the bulk of the CDS contracts expire? Perhaps at that time they will withdraw their bid?
April 10th, 2009 at 1:46 pm
The bar for earnings season has been set so low (“we beat today”, “turning the corner”, never mind that estimates were ridiculously low to begin with) that I get the sense that this rally could go on for a while but I can’t see it lasting into the summer with so many people still losing jobs, homes, etc. What are they gonna do when numbers get even worse in Q2? Keep guiding downard with hopes of beating those increasingly low-balled estimates each quarter? Don’t think that will work but we’ve entered the realm of bizarro world, and anything seems possible. Without the jobs, real estate situations stabilizing, how does the economy really turn around so quickly? Will everyone (including the jobless) merely charge everything on credit? If that’s the case, this is merely kicking the can down the road and at some point this is all going to end very badly for this country.
April 10th, 2009 at 1:46 pm
I don’t understand why anyone would think this is a sustainable rally or that the economy is better because of a rally. All it proves is that hope and a heartbeat still exist. The ‘patches of green’ are not indicative of the coming Spring. They are just signs of continued life that may grow over a fairly long time.
I guess it’s just easier to look at one thing, assume experts are in control, and draw a false conclusion. It also proves that people with money are not necessarily smart.
When did a diminishing rate of economic decay start to mean the same thing as Whoopee? I suspect that only the ignorant use the stock market as the only economic indicator of importance. Or people assume TV pundits are economic gurus, as opposed to cheerleaders or people who think the markets will go in the current direction forever. Wake me up when someone heard the thud at the bottom.
April 10th, 2009 at 1:50 pm
leftback @ 12:30
“In both views, we will sell in May and go away”.
Leftback… Go away?
I think not.
April 10th, 2009 at 1:55 pm
BR noted
This run-up appears to be a classic bear market rally. Do such rallies indicate anything more than investors desperate to find good news anywhere? Or do they suggest a real return of confidence?
Reply:
—————
My confidence in suckers who chase a rising market has been renewed and strengthened. Had I suspected these people would still chase the market like a kid runs out of the house for ice cream, I would have held on longer. Next time, which probably means next quarter, Cha Ching! These cycles are flowing pretty fast and there just might be a golden age upon us. The S&P may be running at 4 HZ for another year or more.
April 10th, 2009 at 1:59 pm
I think 10% pull back is in order, take it down to the 750~ area. Yesterday was day 24 of this rally, Nov-Dec lasted 29 days. Rallies don’t last forever.
I think the catalyst will come from over seas, most likely Europe in either earnings, or additional stress brought about by eastern Europe. I’m not sure how much more we can prop up European banks through AIG payouts.
April 10th, 2009 at 2:06 pm
@DL: True. True. We would at least lurk. It would be quite unlike us at Schadenfreude Asset Management to miss out on a long slow inexorable decline of the market – along with the wealth of many rich inwestors.
April 10th, 2009 at 2:09 pm
What’s going to make this next market dip even more painful is the Obama administration is implicitly telling people the market’s a good buy again, so the people who follow his lead now and get burned AGAIN are going to be even more pissed off when it happens. I know O needs to talk up the economy but he needs to be careful a bit with that. If he overdoes it with the Bush-ian happy talk, it could well come back to haunt him if things ultimately get worse like I think they will.
April 10th, 2009 at 2:15 pm
If it is a bear market rally, then it is a synchronoized global one because nearly all stock markets around the globe are ripping.
Domestically, I’m inclined to think investors are interpretting a move to restock all the inventory that’s been liquidated over the past 6-8 months as the first signs of cyclical recovery. But with about 70% of our GDP driven by consumer spending, I don’t know how we can have a cyclical recovery without consumer cyclicals like housing and autos leading. And that’s just not going to happen with tons of excess housing inventory that still needs to clear the market and 600K people per month getting fired. And don’t forget the sudden sense of frugality that is driving the consumer savings rate to over 5%, which is another drag on domestic consumption.
On the other hand, new investment grade, high yield and convertible bond issuance are coming to market. Although credit spreads have been tightening fast and hard, the deals coming to market are pricing at wide spreads by historic norms ( implying a surge in corporate defaults is expected over the next 18-24 months). Economically sensitive commodity prices are once again mostly now in nascent uptrends, but I think that is mostly due to all the production that was shut in after the Lehman bankruptcy, creating artificial scarcity. But that shut in production can be brought back online quickly once volumes pick up to make it economical to do so. Finally, the FED has never been so accomodative.
Lots of conflicting signals to sort out.
April 10th, 2009 at 2:34 pm
This run-up appears to be a classic bear market rally. Do such rallies indicate anything more than investors desperate to find good news anywhere? Or do they suggest a real return of confidence?
Behaviorally it is clearly a bear market rally – bull markets don’t rise in a series of 200-500 point convulsions.
The real question is whether it has the potential to take a run at 1000 on the S&P.
I do think a couple of things this rally has going for it is that it started from deeply oversold conditions, had a lot of short interest to provide a tailwind, and it has some legitimate buying beneath it – as somebody who’s bearish on stocks I’ve started allocating some of my retirement account contributions to stocks now just as a hedge against the hideous fundamentals of the dollar.
The flip side is there seems to finally be some euphoria developing among the bulls and distress among short sellers: “How can it keep going up and up? Maybe this thing really is the real deal”. The guys on Fast Money were practically dancing on their desks yesterday. I remembered they seemed quite gloomy when financials were up just 40%.
Right now I’m following Marc Faber’s forecast (down to around 750 then back up) as a guideline, but the simple fact is a single shock could pull the bottom out. Or enough short-sellers aiming for 750 could halt any correction in its tracks.
My view is there’s probably two key turning points here because in the end the economy is still desperately ill:
1) A negative shock that starts a free fall.
2) Buyer exhaustion combined with short-seller capitulation.
I’d like to see #2 because it’s easier to time and trade aggressively – IMO the ideal rally from a short-selling position is one that breaks up at the end in a low volume exhaustion.
April 10th, 2009 at 2:39 pm
If it is a bear market rally, then it is a synchronoized global one because nearly all stock markets around the globe are ripping.
It’s been that way for years.
Emerging markets are kind of like those Ultra ETFs equivalents of the US markets.
April 10th, 2009 at 2:44 pm
Mannwich @ 2:09
Mish’s lead story (4/9/09) is about how Obama is telling people that now is a good time to refinance their mortgages. So I guess that, at the same time Obama is telling people to buy stocks, he’s implicitly telling them to short Treasury bonds and Agency bonds.
April 10th, 2009 at 2:47 pm
Saw that, DL. Like I said, he’d better be careful. If/when the market tanks again, all of those retail investors that got screwed again (who largely took O’s “advice”) are going to be ripping mad when they also see the banksters get yet even more bailout money from the taxpayer (but, hey the taxpayer can then borrow his/her own money from those banks at terms the banks set…It’s a “win-win” for all!). Perhaps O knows something we don’t about their plans to prop up the markets to ensure that doesn’t happen?
April 10th, 2009 at 2:49 pm
On that theme, we might need to rename the “Greenspan Put” to the “Obama Put”.
April 10th, 2009 at 2:50 pm
Outstanding consumer credit is shrinking, not growing. That trend will continue.
Inventory is not going to come rebounding back, look at china and Japan. They are our 30 day lead time. They are reporting down numbers. People are not buying as much, and every purchase is being weighed.
The US is in good shape. The stuff I’m hearing from Europe, are phrases like “Not Good”, “Dismal”. Eastern Europe is worse.
April 10th, 2009 at 2:51 pm
Super-Anon @ 2:34
A lot of people talk about squeezing the shorts in this rally. But I’m not convinced that short interest is all that high. I think that, more important than the short sellers is all the cash on the sidelines. This rally is no doubt inducing quite a few mutual fund investors to throw caution to the wind.
April 10th, 2009 at 2:56 pm
Sell ‘em. Wile-E-Coyote time is not far away.
April 10th, 2009 at 2:59 pm
Super-Anon @ 2:34
A lot of people talk about squeezing the shorts in this rally. But I’m not convinced that short interest is all that high. I think that, more important than the short sellers is all the cash on the sidelines. This rally is no doubt inducing quite a few mutual fund investors to throw caution to the wind.
IIRC the short interest data actually showed a pretty good rebound in the first two weeks of March, particularly in Financials and Technology. Now look at where the NASDAQ is relative to the S&P in this rally.
I just base that claim on a couple of articles I read in the financial media though. I wasn’t tracking the data that carefully.
April 10th, 2009 at 3:01 pm
Actually there are answers if Obama would consider truly thinking outside the box….
Which entity is the only one allowed to run a deficit now? That’s right…Uncle.
Health care is unaffordable to those working 30 hours and the states have to balance their budgets every year, so how to make health care affordable when it isn’t?
Drum roll….
Let people too y0ung to qualify for medicare buy into medicare for a fee…..
Positives:
Program is already in place
Unlike medicaid, funded nationally, doesn’t require states to go further in debt.
When reach retirement age (of medicare) age specific rules would go back into place
Would prevent catastrophic costs to those with medical emergencies who couldn’t afford private insurance but would like to work and would not qualify for medicaid. Part timers, etc..
Would make Obama happy, and socialism would continue apace.
And so forth.
Barry, you have my permission to call this the B in T/BR Tarp Insurance Plan….
April 10th, 2009 at 5:03 pm
Barry,
About this impressive run of the markets, there is a post at Zero Hedge blog that may be of interest and deserves your attention IMO.
You know me, I rarely point out stuff like that without further comments, but I have to make an exception here, since it is not amenable to a 10-seconds blurb.
http://zerohedge.blogspot.com/2009/04/incredibly-shrinking-market-liquidity.html
April 10th, 2009 at 5:28 pm
F.T. @ 5:03
Interesting post by Tyler Durden. SRS @ $250 would make me ecstatic.
April 10th, 2009 at 5:30 pm
FrancoisT-
Thanks. I had been reading the April 9th post on the market neutral and this more recent one is stunning.
The Wells Fargo announcement was so out of whack that these charts had to exist.
The thing is the lies prefigure the truth. Earnings can’t be good, so they must lie. Anybody up in F might consider accepting Mr. Market’s time-compressed largesse- there will be other opportunities.
I recommend people cast an eye to goings-on in Puerto Rico, something is brewing y será un café más prieto que la noche.
April 10th, 2009 at 5:42 pm
In the ZH post, TC talks about GS’s program trading. He says:
“Key to note here is that Goldman’s program trading principal to agency+customer facilitation ratio is a staggering 5x, which is multiples higher than both the second most active program trader and the average ratio of the NYSE, both at or below 1x.”
Did he find Sasquatch’s footprint?
April 10th, 2009 at 5:44 pm
MRegan @ 5:30
If I were a “megabucks” money manager, I’d get together with some other big bucks managers and create a selling stampede by dumping all our shares on the same day (but not before loading up on put options first).
Seems to me that if a small time investor like me can figure it out, the “big boys” should be able to also.
April 10th, 2009 at 5:47 pm
DL-
“Why, Beauregard! Isn’t that sort of collusion illegal?” (she said fluttering her eyelashes).
April 10th, 2009 at 5:55 pm
“The proper way to approach the question is to think of the market as an ecosystem of liquidity providers, who, based on the frequency of their trades, generate a cushioning to the open market trading mechanism. It is a fact that the vast majority of transactions in the market are not customer driven buy/sell orders, but are in fact high frequency, small block trades that constantly cross between a select few of these same quant funds and program traders.”
the definition of “the font(s) of the eternal bid(s)”
FrancoisT,
nice post..that ZH cat knows where the mice are..
April 10th, 2009 at 5:56 pm
@FrancoisT: Fantastic post by Mr. Durden. Thanks for sharing. I knew there was a PPT!! Now if we can only get SRS to go to 250+, I will be one happy Mannwich.
April 10th, 2009 at 6:22 pm
Jeff,
you ever think of fading the Oct30puts and buying the Oct50calls, for ex.?
http://finance.yahoo.com/q/op?s=SRS&m=2009-10
quotes, as you can guess, are lame/no market..
April 10th, 2009 at 7:06 pm
to anyone that thinks this is the start of a bull market good luck. why can’t people understan that his is the biggest credit bust in financial history. there was a 25 year credit expansion and the last few years it went parabolic not to mention a housing bubble that was insane and has bust. to think that this sescular bear is resoved in 17 months( which woukld be the shortest in history) is hysterical. the quant funds right now are BLOWING UP. thye are long the credit of financials in abig way and short the equity. the credit in financials has not budged while the equity thanks to gov intervention has exploded. these funds are feeling extreme pain and have exagerrated the short covering in financial equity. the gov loves this as it allows financial slugs to raise equity from private investors. will this continue? maybe but it’s all gov ponzi finance. market neutral funds are getting hammered and are at the lowest level according to the hedge fund index in quite some time. a trend is about to form or else the market is going to collapse (my bet) to new lows. either way a huge standard deviation is about to happen. on a diffwernet note what happens if the dollar actualy breaks higher. the world will be in absolute shock
April 10th, 2009 at 7:26 pm
@harold
I would argue that the secular bear move has been from March of 2000 through today, not just the past 17 months. That would put us in year 9. The last secular bear was 66-82, 16 long years. The more interesting point about that secular bear was that the actual low was late in 1974 way before the new bull finally emerged…
http://moneyneversleepsblog.blogspot.com/
April 10th, 2009 at 8:34 pm
Sorry, but all of the hand-wringing and naval gazing by the NYT and the rest of the corporate media is not going to put Humpty Dumpty back together again.
What to know which way the wind’s blowing? Step back and take a look at a 10-year log chart of your favorite US stock index. You have a better chance of winding waldo than a bottom.
It’s not even subject to debate.
April 10th, 2009 at 8:46 pm
cube,
that’s too true. I stopped in on this place called “The Mutual Fund Store”, yes, I know..
a couple of weeks ago, they had a Huge Wall Chart of the various Equity Indices up..
ended in ’007, I was asking the dude, hey, you know, what about ’008?
“O, we hadn’t gotten those in yet…”
Gee, I wonder why..
April 10th, 2009 at 9:03 pm
The big rally in financials, topped yesterday with an orgy of buying and short squeezing after WFC’s rosy pronouncement, feels highly suspect, as does the characterization of the current stock market uptrend as the secular bull’s return.
New FASB rules that permit prettier numbers change nothing. Indeed, such tinkering invites even more skepticism about the true value of illiquid assets.
The so-called ‘Stress Test’ allows every bank a passing grade. However, the results shall remain a secret. Total boost to confidence: Zero. Perhaps a net negative.
The cascade of all kinds of debt default is increasing. Meanwhile, Bank of America is the lastest credit card issuer to announce that low rates on its most creditworthy cardholders will be increased at this the worst possible time. The bank gets to borrow at 0.00%, we’re bailing them out and this will help the economy and non-FI earnings and stock prices how?
The Pirates running the show can do only three things: Try to jump-start confidence through lies, deceit, manipulation and illusions; loot the system for their personal gain; and, inflate the currency.
The Fed and its cronies can intervene in the market and bid up the bank shares with unlimited funny money. Politicians and Wall Street’s media shills can happy-talk the rally ’til they’re blue in the face; the facts are hard and cold.
Nearly every sector is now grossly overbuilt and overextended. At the same time, there is just no evidence of any substantial or significant turnaround in unemployment, real estate, debt default, disposable income or consumerism which would give this rally real solid bull’s legs.
How far it floats is anyone’s guess. My gut feeling is that major, shocking outings of Truth are coming, and soon. Then, look out below.
April 10th, 2009 at 10:01 pm
“MRegan Says:
Did he find Sasquatch’s footprint?”
Dunno about that, but it is striking to see how big a dawg in da ‘hood Goldman Sach is. On a related note, I couldn’t help myself laughing real hard when I read elsewhere that the positive flow of cash toward mutual funds (11 billion last week vs. 3.2 billions week prior) was “helping” the markets rise.
I mean, 11 billions? Mbwahahahahaha!
One thing is obvious as per Tyler Durden’s post: It could be a very ugly waterfall drop in the markets sooner than later. Wonder if talks of recovery will still dominate the punditosphere when that happens.
*evil grin*
April 10th, 2009 at 10:36 pm
How has dollar cost averaging worked the last decade?
And do you really believe that the decline is slowing?
April 10th, 2009 at 10:56 pm
Shorter term I am betting the US dollar is overbought but, yeah, I think it’s going to break higher intermediate to longer term: Not becauase it is ‘better’ than other currencies lord knows but because I believe we are headed for (another) period when everyone will be very reluctant to own anything denominated in anything else. JMO
April 10th, 2009 at 11:28 pm
It’s always a good thing to confirm an hypothesis using different perspectives. To add to the ZeroHedge analysis mentioned above, I thought this paper:
http://www.calculatedriskblog.com/2009/04/using-corporate-bonds-as-economic.html
via Calculated Risk could be interesting.
This rally can KMA, for all I care.