Is the Rally Ending, or Does it Have More to Go?
OK, its 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).
• 1929 Versus 2007: Employment Change
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 tomorrow, but we would rather play the high rather than low probability outcomes.
Here are 5 most reasons why I think we can have more upside, plus a look at some grim economic reality.
1) Individual investors remain under-invested (See Liquidity/Sentiment Review).
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 . . .
September 17th, 2009 at 8:48 pm
I’m with you Barry, as most here already know. Lots of upside to go. At least another 20%. I suggest utlra ETFs to double the ride up as I’ve been using.
September 17th, 2009 at 8:58 pm
Harry: Thanks for responding to me in an earlier post. Good luck with your positions.
Barry: I’m hearing enthusiasm for equities from “amateurs”. Eerily similar to the dotcom bubble.
What is so shocking is that 12 months ago we were on the edge of a cliff – where suddenly everything was in question: dollars, banks, stocks, real estate, counterparties, etc.
It is stunning that we can go from abyss to euphoria in 12 months. Actually, this is just hard for me to grok. It is this rapid and intense turn in sentiment that has made this rally so unusual.
Are people really this nuts. Weren’t we just talking about the destruction of western capitalism? And now everything is great? Euphoric even!
September 17th, 2009 at 9:08 pm
All we are waiting for is the next Black Swan; any event that will allow the perma-bulls to cry “hoocoodanode”
Irrational monetary and economic policy is still the name of the game. It works fine…until it doesn’t.
The real trick is trying to guess what the Black Swan is going to be and when.
September 17th, 2009 at 9:16 pm
There may be more room for the market to run, BUT I STILL DON’T HAVE A JOB! At some point the unemployment rate has to catch up and either companies begin hiring or this bull market will run out of steam and get a heavy dose of reality again.
September 17th, 2009 at 9:16 pm
“It is stunning that we can go from abyss to euphoria in 12 months. Actually, this is just hard for me to grok. It is this rapid and intense turn in sentiment that has made this rally so unusual.”
I have some relatives with ADHD and some other relatives with manic depression (now known as bipolar disorder). Euphoria and extreme grandiosity is common in the manic phase. Did the world look black yesterday? Hey, yesterday was a thousand years ago!
As far as I know, HW is not one of my relatives, but he sure sounds like them. I hope he remembers that this upswing is being driven by guys who think just like him. Remember the greater fool theory?
At midnight the angel of death is scheduled to arrive. But nobody is wearing a watch, and this party is so much fun. It’s just getting started! Let’s gather around the punchbowl for another round! I’m sure we’ll remember to get out the door just before midnight.
September 17th, 2009 at 9:17 pm
economy,
finance,
markets –
3 different ditties for Jack and Diane
September 17th, 2009 at 9:21 pm
Which would frustrate more participants now, further rally, or sudden onset of pull back out of nowhere? The bears(myself included) would be more bothered by further rally, than the bulls by pull back, but there are way fewer of us I believe( by bears I mean bearish positioning, not merely bearish outlook-which actually brings up something that really scares me about being long, that there are many tentative longs, owners of stocks who don’t believe in the fundamentals or the longevity of this rally who probably have tight stops and/or will bail at the first sign of real turbuence.) So my point is that I believe that now more poeple would be hurt by a sudden pullback that kept going down. Some people would keep buying it too, no matter how far down it went. I would love to hear from some of the longs like HW and BR and others where there stops are ( just to use as a mental data point). I think it might help us all assess the situation. I’ll share too, from the short side- I don’t have stop orders in place but if the dow goes to 9,900 I will close all my shorts, but would jump back in again at 10,300 or 9,200.
September 17th, 2009 at 9:23 pm
Should read “their stops”. Sorry.
September 17th, 2009 at 9:34 pm
I’ve always thought groups of individuals have the same behavioral traits and psychosis as one individual. I totally agree with Nemo that the US is undergoing some kind of mass schizophrenia.
Via Google: “Schizophrenia is a mental disorder that makes it difficult to tell the difference between real and unreal experiences, to think logically, to have normal emotional responses, and to behave normally in social situations.”
That is the best description of our current political and economic situation.
To mend together both Nemo and Scott, those of us who acknowledge we have a problem (bears) will be able to handle the next hangover than those in denial (bulls).
2008 was like a bad coke hangover and rather than dry out and kick the habit we just snorted a whole bunch more coke and added heroin to the mix. This will end badly.
September 17th, 2009 at 9:36 pm
the market peaked this morning just under 1075 on the SP500…
just like all the other trend followers you always hang around too long BR
~~~
BR: I actually don’t, because we use other factors besides trend.
But consider the alternative — more or less “guessing” when the trend ends.
That can leave traders capturing a very small percentage of any move, especially off deeply oversold levels. I know lots of funds that bought into the March lows, only to hit bits 20% higher a few months later. That left lots on the tabel.
September 17th, 2009 at 9:37 pm
im waiting for something to come out from a global perspective- i.e. Chinese, something to pull this market down.. Shorts dont work with the liquidity injected in this market. I’ve got a small % of some short but mostly long- long good stuff
September 17th, 2009 at 9:39 pm
“FOR TWO THIRDS OF THE TIME, THE ECONOMY REALLY DOES NOT MATTER.”
Wouldn’t surprise me at all! However all of this analysis leads me to believe there will be far more people poised to click the “sell” button and hope they get out before the others. Whose computer will be faster?
September 17th, 2009 at 9:45 pm
Barry – overall agree with your points. One quibble, possibly major, between 1Q1947 and 2Q2009 the correlation between corporate profits and GDP and between the SPX and profits were both in the 90% level. The problem is turning points; Buffett/Graham are right. Eventually reality sets in.
Which comes full circle to your point – imho right now we’re running on momentum which morphed from relief that the world didn’t end but is not self-fulfilling. But there’s no fundamental, in either the economic or business sense, here. As Rosie points out the markets are pricing in 4% GDP growth – huh?!
September 17th, 2009 at 10:07 pm
As I have said before, I think that we probably will climb higher — but only as high as the previous peak, and then the stock market will turn back to follow the economy. Probably in an orgy of leveraged shearing of the sheeple that are lured into the run-up. This is the shape of the W-shaped recovery, only I expect the last up-leg to be a bit shorter than the others, asn much of the motive force will have been sucked from a diminishing economy.
Note that the volume has been steadily decreasing, with each up week. This can continue for some time.
I expect that the next significant drop will be initiated by some random event — my favorite is a foreign currency “oops”, where the foreign currency in question might be anyone’s, even ours. But it could also be a failed (or successful) backstabbing of one bankster by another, a falling out among thieves. Or it could be some natural phenomenon, earthquake, hurricane, volcanic explosion, plague. The are a lot of ways that the unexpected can present itself. When the markets and economy are robust, with lots of value and depth to them, it takes a much larger incident to knock the train from the tracks. But when the economy is burdened to the breaking point with debt, when profits (in dollar terms) are small, and revenues also, when the majority of the workers and consumers are more concerned with making it to the end of the week rather than taking the present for granted and looking ahead to the future, that’s when nobody stands against the wind, and only a small breeze is enough to knock down the house.
The thing that bothers be about all this is that by propping it up and sucking all the strength from it, when the crash comes, it will be brutal indeed.
But that doesn’t mean that a nimble investor can’t catch a small profit here and there on the way up. Just be sure you have a chair when the music stops.
September 17th, 2009 at 10:15 pm
I just remembered a famous quote:
“You know, Paul, Reagan proved deficits don’t matter”
Vice President Dick Cheney, speaking in 2002 to then-Treasury Secretary Paul O’Neill
“… Valuations are rich, but record profits support the multiple.”
I guess we must be in for one hell of a long bull market, to get those record profits supporting even the current multiple, let alone what it would be like moving upward from here.
Is that how it worked out for the Japanese? How did the Nikkei slide for the past 20 years?
September 17th, 2009 at 10:19 pm
Interesting to see why smart people want to engage in a debate about predicting the future. Sometimes person A will be right, other times Person B.
Now if you both compare your returns on investment YTD each year, that would be a more interesting and objective contest.
I predict the market will end lower at tomorrow’s close. If I’m right, so what?
September 17th, 2009 at 10:24 pm
“If I’m right, so what?”
if you make money doing it…so?
So Lets Dance!
September 17th, 2009 at 11:03 pm
I’m a bear and this rally has exceeded Bear Rally Dimensions, so am I worried?
[BR: I don't think it has -- see this chart]
No. This market is currently in total detachment mode due to the Fed (there were posts about that here on Monday and Wednesday). I’m not bothered if it goes higher because that only confirms my view. I had been irked by the action from March to around June, and got irked again with the second wind. But as the market kept on rising in August and September, it became almost funny to watch. There comes a point when the numbers are so over the top, that you can’t believe it’s real. One could argue that the Fed was too good at raising asset prices; that they shouldn’t have allowed the market to exceed credibility.
I think the Fed’s plan was to bolster some asset classes in the hope that the economy would, in a short while, catch up so that valuations would conform with reality. But it’s not going to happen. Enormous net worth has been lost, but more important, there is no sign of income growth for the typical consumer. And borrowing won’t work this time.
This market is only for the professionals. Everybody else got scared out, or scared stiff (i.e. no trading). And they are right, in a way, to see money making opportunities in an asset bubble.
I share SavetheWhales observation about the “stunning” turnaround. I’ve seen decades of market action but this time there was an extremely brief (practically nonexistent) period when people were bummed about the market. Never saw that before. There typically was a two-year period of slumpy/grumpy action around 91, 82, and 74. And this recession is worse! Not a cyclical inventory/inflation kind of thing, but a massive wipe out of net worth. I think some of that has been moderated by government policy (mostly unemployment insurance), but it cannot last. Nor can the Fed keep on levitating the market. A reversal to downward action could start tomorrow, but I think it’ll be a couple of months ahead, possibly as late as early 2010.
I’m not calling for a Depression or end-of-the-world, but a serious move to DOW 7,000 (and other indices similarly positioned) as we pay off our losses and adjust to a somewhat lower standard of living.
September 17th, 2009 at 11:13 pm
saw a version of this, this morning, on the Newsstand:
http://www.usatoday.com/money/markets/2009-09-14-investing-for-the-recovery_N.htm
had to part w/ a Paperback to pick up the dead-tree version..
thought it was worth it, I heard Bells tolling, when I saw it..
September 17th, 2009 at 11:20 pm
@BR: GREAT CHALLENGE. Sorry CV.
Well yeah. Logic, fundamentals, reality. Things peeps would like to think they aspire to. BUT.
Can you spell LEMMINGS?
And you get to dish and bank before the wheels come off. That’s the WS magic. Suck ‘em in and pump ‘em out. You get yours off the top. That’s the WS agenda.
But at least you lay a warning between the lines.
Hey, the traders are pissed. It’s only going up.
Harry is bruising everyone.
Personally, I learned a long, long time ago for myself, after hearing from friends about the commodities market, it’s a rigged game.
I made a conscious choice for myself that it should not be about money (spelled greed).
“And Jesus drove the money changers from the temple”.
Well, hey, Jesus was a Jew.
And the Islam religion does not believe in interest. Or didn’t.
September 17th, 2009 at 11:27 pm
agree on your analysis yet i’m a bear, simple kiss business stuff, profits can’t pay the debt, the fed now owns all of the leverage, for some reason what was bad for the banks is great for the us of a, the last 30 years every analysis every budget was derived with cheap energy and when that broke the back, now it is cheap dollars………..the grand assumption is that there will always be buyers, always……..the greatnest of compounding interest looks beautiful on paper, yet when applied to debt it is scoffed at
cost of goods in the philly fed went up 50% and foward stuff all was terrible
the only savior is the ctfc if they put the kabash on oil, cause at 85 bucks them budgets are cooked
September 17th, 2009 at 11:39 pm
BR,
I understand it’s “fun” to some extend when it’s your job but we are also talking about lives here.
I can’t imagine the pain of a retired person when their whole life is being blown away by over optimistic or downright dishonest market players.
I’m gonna sound pathetic and I don’t care, we have a responsability towards the good of all, my freedom stops where yours begins and no-one’s fortune should be made on someone else’s misfortune.
That’s what this stinking rally is, inflate, lure them in and then plunder what’s left.
Disgusting.
Where has personal responsability gone when you look at this shit?
It all goes to hell a few months ago and it’s nobody’s fault, Greenspan still walks around like his turds don’t stink, Bernanke, Bush, Summers, Clinton…
So now, we’re supposed to believe in this line of crap of a recovery, jobless, changeless.
~~~
BR: People are responsible for their own behavior, futures, retirement, etc. I spent a good few years warning about hosuing, credit, low interest rates, derivatives, etc. A small handful of us did, and we were roundly mocked for it. And to add insult, the masses ignored the warnings anyway and lost tons.
You cannot make peopke smart, you cannot prevent their own greed or inertia from blowing themselves up.
September 17th, 2009 at 11:54 pm
Another question in my mind is where will we ultimately end up. Oh yeah I know 6′ under but a wee bit before then at some hypothetically stable point in the future what is a realistic level of prosperity that one could be comfortable with? How much of the prosperity experienced say 2003 to 2007 was real and sustainable? How much did debt growth contribute to GDP and was there realistic a stable equalibrium that was overshot or did a wild debt orgy just bring forward a collapse that was inevitable at some point in the future? Perhaps I should be reading Minsky…
September 17th, 2009 at 11:55 pm
Put me down for the Depression/Top soon camp, although I admit that top calling is a fool’s game. The most important thing is to protect one’s portfolio by either being in cash or adequately hedged. Who knows? We could have a “sell to whom” moment a la ‘87. May the proposed flash trading is a catalyst? Maybe next week’s FR meeting? One thing’s for sure, Ben the Academic starts jawboning a stronger dollar or get ready for a dollar collapse. I realize that the “reflation trade” has benefited from the dollar carry trade, but we are at or very near an inflection point where either move for the dollar will be bad for equities.
September 17th, 2009 at 11:56 pm
I’m there, man! I agree with you. The guys in the office that are still trying to reconcile Rosenberg with the market, I plead to stop. Most of the time the Economy and the Market are on there own individual gameplans. That was the big hint in the spring!! When that whole “green shoots” thing and second derivative thing was going on—it was people separating themselves from the reality that the economic news really wasn’t relevant…
I really think the 30’s and now rhyme more than the world gives it credit….and that first bear rally in the early part of the depression was MASSIVE. If you match up timelines and how far along we are into this crisis, the news being generated then is freakishly like what we see now. If you match up the growth of unemployment…we’re pretty much tracking it… And don’t let anyone lie to you about back then—they initially were very aggressive with monetary policy and interest rates while Hoover was still in office, they just weren’t as radical as Bernanke… And as things progressed, protectionism set in…and we just did our first tariff.
Look there is nothing magic about this. We are HUMAN and by and large we act similarly to the crisis because that’s how we act… It isn’t smart. It isn’t on purpose. It just is… You know why most people are terrible traders? Because they act to a given circumstance just like everyone else does. The successful trader doesn’t–either naturally, or through hard learned discipline that has over-ridden instinct.
Politicians now are going to act like politicians then not because it is the right thing to do–but because they want elected and the terms of service are the same as they were then, causing politicians to be too short sighted in their actions.
This is not hard stuff. The rally will go further than most are willing to believe–because not enough people believe it yet. Mutual Fund flows show too many retail people are flooding into bond funds and out of equity funds. This means the “dumb” money has yet to be suckered back into the market. On top of that retail aspect, we have some of the most aggressive traders in the world that are now unfettered by TARP over at GS and other places. They are gunning for their bonuses because they can. If the calendar was a horse track, we’re rounding the fourth turn into the final straightway for year end. The trend is up. Which way do you think traders are going to try and push it to reach their bonuses? Fight the trend??? No!! Try the trend first, then if it won’t continue, take it the other way. But the path of least resistance is up. Seasonally strong period coming up in a couple weeks. More “less worse” news firing things up. Earnings. It isn’t hard to see a lot of things other than fundies are factoring into the market direction.
Now does that mean the market won’t pull back? No! In fact, next week would shock me if we didn’t string a couple down days to recharge the troops before running the market to the end of 3rd quarter.
Don’t be optimistic. Don’t be pessimistic. Be pragmatic and realistic. Make money and worry about being right another day—in 2010.
September 17th, 2009 at 11:58 pm
BR, what gives? All of my comments after bergsten’s reply (yacht thread) are being flagged. Did I say something wrong?
September 18th, 2009 at 12:08 am
Oh, I do have to disagree with your unemployment graph… here’s unemployment from 1929 to 1939. If 1929 is analog to 2007 and we use U-6 numbers, are they not tracking more closely than your previous chart referred to in this post suggests?
1929 3.2% < Hoover era, Great Depression begins
1930 8.7
1931 15.9
1932 23.6
1933 24.9 < FDR, New Deal begins; contraction ends March
1934 21.7
1935 20.1
1936 16.9
1937 14.3 < recession begins, May
1938 19.0 < recession ends, June
1939 17.2
September 18th, 2009 at 12:21 am
HarryWanger Says:
September 17th, 2009 at 8:48 pm
I’m with you Barry
—–
No, you most certainly are not. Go back and re-read his post, concentrating especially this part: “the broader investment community believes — incorrectly in my opinion — that a recovery is upon us, profits are getting better.” That is essentially the precise opposite of what you’ve been asserting since you arrived.
September 18th, 2009 at 12:23 am
Your #1 justification does not seem like a legitimate indicator as some commenters have suggested the few times you’ve posted it. It’s more of a momentum/RSI-type indicator than anything….in other words, useless except at the very, very extremes.
In terms of #2…market volume on average, has been declining since the bigger volumes seen in march…For me, that suggests a market with waning interest. The volume has been bigger very recently, but one could easily chalk that up to ‘blow off’ behavior as johnny retail finally enters.
In terms of #3….don’t understand how that’s a supportive argument for a rally….the “broader community believes….?” What the hell does that mean?
In terms of #4….yeah, no shit big bears have big rallies. We’ve had a 60% friggin rally….you want to suck that last 3-4 % off the bone? Really?
Don’t know Mish…..don’t know his site…don’t even know what his arguments are….but those are fairly weak arguments there….
We may very well continue to grind it out, but there are some darker signals emerging up at these levels….
Good luck with that last 10%….you may get it, but at this point it looks similar to those folks who were “reaching for yield 2005-2007.
Best.
September 18th, 2009 at 12:30 am
Barry, is your mother still alive? My mother is. Have you asked her opinion? My own mother asked my opinion.. of course, it was just a test.. she already knows what she thinks. I said, Mom, I think it is going to get worse, much worse.. we are only at the beginning of it. She said, Karen, there are no jobs, we are headed into a depression..
So I suggest, everyone ask their parent(s) what they are thinking.. most of whom have live a lot longer, and seen a lot more, than we have.
September 18th, 2009 at 12:39 am
I am happy that Barry is posting this. A couple of weeks ago on a 2% drop, he said “overdue correction” and just a few days ago “look out below” when futures were pointing lower. We know how those calls have turned out.
[BR: "look out below" is a comment on futures, not a market call]
As I have been saying there are too many people suspecting this rally. Too many looking for a correction. Of course, ben22 has presented opposite argument – but I still “feel” there is (or was) a lot of skepticism about the rally. Each day of 0.4% gain in SP500 has made me feel better about getting short.
During, the last 8-9% of the rally I have noticed many good signs.
1. Bulls have become more vocal on bearish boards.
2. On TV happy days are here again. “Experts” are touting the right asset allocation mix going forward, favorite sectors (which have already gone up 100% in last 6 months) etc.
3. Fast Money has stopped asking “Bull market or BS”.
4. Very rare to see someone seeing any clouds over horizon.
5. Recession is over mantra is being repeated by people who failed to see any sign of recession at all.
All very good. Problem is technicals are strong for the mo-mo players. We need some external trigger. Here is my list of possible origins of a next black swan.
1. Some state bonds (like CA) getting into serious trouble.
2. Some eastern European country defaulting on its obligations
It’s unlikely for a major bank to give a warning now with so much help from Govt. Also a sudden USD reversal may happen, although chances are slim for a major turn.
My cynical idiot side says, no crash till Bernanke starts his next term.
September 18th, 2009 at 12:54 am
All very good. Problem is technicals are strong for the mo-mo players. We need some external trigger. Here is my list of possible origins of a next black swan.
Bear market rallies tend to end on good news (or simple exhaustion), not bad news
Misgh
September 18th, 2009 at 1:02 am
@ r says
Mish is brave enough to post his track record in public… kudos. (Sitka Pacific Capital Management). Depending on the strategy, it appears his model portfolios are up 45-60% since mid 2005, with reasonable drawdowns since the beginning of the meltdown. Not bad!
http://www.sitkapacific.com/account_management.html
disclosure: I am not a client, just an admirer
Not sure if BR has a public track record available.
BTW, my (private investor) model portfolio has been engaged in a public real-time “live test” with every trade publicly posted in advance for 87 weeks. Sadly, the live test was brought to a close last week due to other time commitments.
September 18th, 2009 at 2:38 am
I read both Barry and Mish almost equally. I find TBP more diverse and entertaining and the comments far more analytical and informative not to mention that TBP just looks better. BUT I have great admiration for Mish. His grasp of Macroscopic Economics, as he sees it, and his ability to communicate it is incredible. He also appears to have a real talent for turning his understanding into actionable investment strategies. Politically I am closer to Barry I find Mish to be significantly too rightiously anti unions and anti social services. These things in appropriate proportions I find to be necessary and good.
As for bearishness vs bullishness I think either Barry or Mish could be right. It is even possible we are in the 6th innings of a series that could end up in a draw what-ever-that means.
In my mind the big losers going forwards will be the Mutual Fund holders and managers. They are just not going to be nimble enough to survive. They are going to be the saps left holding the old maid. Simply by their own operating framework whereby they need to beat the market to justify their existence they are terribly vulnerable. Beating a severe bear market by a few percentage points is not going to please your clients one little bit. Not when it can drop by 50 60 70 or 80%.
September 18th, 2009 at 4:13 am
Hi Barry,
Just wondering if you saw the update on the derivatives? If you remember everyone said no big deal because they were notional?
Update on Derivatives here.
$1.14 quadrillion get a load of this!
No, that’s not a made up word. A quadrillion is one thousand trillion dollars. Not $4 trillion, but $1000 trillion – and change.
Here’s the breakdown, according to the International Bank of Settlements, which acts as banker for the world’s central banks:
1) Listed credit derivatives stood at USD 548 trillion;
2. The Over-The-Counter (OTC) derivatives stood in notional or face value at USD 596 trillion and included:
a. Interest Rate Derivatives at about USD 393 + Trillion;
b. Credit Default Swaps at about USD 58 + trillion
c. Foreign exchange derivatives at about USD 56 + trillion;
d. Commodity Derivatives at about USD 9 trillion;
e. Equity Linked Derivatives at about USD 8.5 trillion; and
f. Unallocated Derivatives at about USD 71+ trillion.
World derivative debt is $1.14 Quadrillion USD. For the US banks share of that see Table 1, page 22 of 33 at
http://www.occ.treas.gov/ftp/release/2008-152a.pdf
http://bluelori.blogspot.com/2009/04/all-hail-government-sachs.html
Hmmm well lookey here
http://seekingalpha.com/instablog/407380-jeff-nielson/27634-a-derivatives-myth-exposed
September 18th, 2009 at 6:01 am
It strikes me that everyone, bulls and bears alike, now seems to believe that we can shortly grind back up to 1200 on the S&P. Indeed, looking at some notes from my Asian brokers today, all of those markets (except Japan the slow) are well above pre-Lehman levels.
As such, with the end of QE in sight and happiness all around, I put my first S&P shorts (1072) and dollar long positions (76.2 DXY) on yesterday having been 100% cash for the last few months.
The market is not in strong hands at the moment.
September 18th, 2009 at 6:48 am
Barry, you and Mish are my two favorite bloggers. I like seeing you guys have a spirited disagreement, but I assume you two mutually really respect one another.
The PC thing to say is that you are both right, however I think you are coming at this from a technical view and Mish is making the fundamental case. My bet is the bear market rally has legs for another few months and then crumbles.
I think people have misunderstood the depression analogies. The crash of ‘29 did not lead to the worst of the depression. The Dow went from $290 in June of 29 to $380 in October and then “crashed”, but the Dow was still at $290 as late as May of 1930.
The lowest price of the Dow was $40, and that was not until the summer of 1932. The Dow had its stops and starts on its way from $380 to $40. The Dow didn’t hit $380 again until 1954.
Mish makes a strong case for deflation, and credit is shrinking as consumer demand tails off. I don’t see why we think this time is any different than in the 30s, the last time demand crumbled, and we had deflation.
As for market reforms, we didn’t get those until 1933 and 1934. If history repeats itself and I am sure it will, my bet is we don’t see meaningful and needed market reform until the Dow hits 4000 in a few years.
September 18th, 2009 at 6:49 am
You say recession, I say depression … Let’s call the whole thing off.
Rather than a baseball innings analogy, why not cricket (I love it): 5 days of play ending in a draw. Wasn’t that the ’70’s?
September 18th, 2009 at 6:57 am
BR, you sound like a momentum chasing day trader. They frequently sound like teenagers who think they invented sex.
September 18th, 2009 at 7:09 am
The world’s food growing and distribution system is so precariously dependent on predictable weather patterns (which are now changing) that we may see a black swan event from this sector as early as next year, but more probably inside of 2 -10 years.
As someone else pointed out here, local and state government defaults will also have a rapid and downward effect on our tentative situation. Most people who can make money off of the stock or bond markets, even those that have jobs and are still getting a simple paycheck, are not looking very far into the future when critical parts of our system of civilization maintenance may collapse. We aren’t preparing for anything but the normal day to day, business as usual, activity. If and when it happens, the effect will be devastating to most of us.
i sincerely hope i’m wrong and that everything will be just peachy-keen going forward. i fear for the future my students and grandchildren will have to “live” in.
September 18th, 2009 at 7:16 am
Barry,
It isn’t a contest. Global liquidity has been increased by central banks across the world. This is what has driven markets. And you may be right, short term. But this house is built on sand. Ken Fisher may think debt is good, and probably short term debt IS good. But the type of long term debt of both citizens and countries that we have created here cannot be a good thing. Not only have we created an albatross, but we are in the process of hanging him upon our neck. Soon, he will start to stink…
September 18th, 2009 at 7:19 am
Agree with BR but have cut my exposure to 20% and will be watching the market closely in Oct. The rally in sep has been fueled by mutual funds investing in stocks to impress their customers with how intelligent they are. although they have underperformed the market due to underinvestment during the period. In Oct that will end. In addition I want to see how the “investors” handle the earning season to determine if I think a sizeable correction is a possibility or reestablish positions. Shorting housing is a good area if the tax credit is not renewed or increased , until something happens I am going to watch football, eat pizza and ignore CNBC.
September 18th, 2009 at 7:20 am
By the way, there are only 4 sites I must read daily. You, Mish, CR, and Prudent Bear. All else depends on what seems of interest for that day…
September 18th, 2009 at 7:20 am
First of all, I think Barry’s call about the sixth inning (bottom of the sixth with two outs) is supported by a lot of “evidence”. Everyone needs to be a little less orthodox and understand that we can’t predict the future. We can however analyze information and determine which of the several possible outcomes have a higher or lower probability.
The fact that this rally is happening is no surprise. The extreme negative sentiment engendered by the MASSIVE drop could only be worked off by a very big rally and in fact a rally like this is a necessary pre-cursor to “another leg down” if that were to materialize.
As far as where this market is headed now, I posted the following chart which to me shows a possible upside of around 1230 on the SP500.
http://2.bp.blogspot.com/_r47sOI__h_M/SneXvwghMNI/AAAAAAAABYQ/C1eIfk8_9c8/s1600-h/Picture+5.png
This 1230 area coincides with the three significant areas: (See Chart)
1) The former neckline of a Head and Shoulders Top that broke down before the crash.
2) The declining moving average on the weekly chart.
3) The measure of the inverse head and shoulders bottom which was recently completed.
To me, this means that the S&P can hit the low 1200’s without any thesis about another leg down being invalidated. Perversely, you need ridiculous upside and a reversal in sentiment to extremely positive to get a big next leg down.
Remember, the liquidity being pumped in is insane. The Index prices are in nominal not real terms and this and other markets are experiencing an attempted and so far successful asset price reflation.
My personal sense is that the market will reverse at some point and that we are not in a new bull market, which to me means new highs on the major indices, not a 20% or even a 60% rally.
September 18th, 2009 at 7:56 am
This is the cue. It’s a psot like this that tells me that it’s time to take money off the table.
September 18th, 2009 at 8:01 am
dougc Says:
September 18th, 2009 at 7:19 am
The rally in sep has been fueled by mutual funds investing in stocks to impress their customers with how intelligent they are.
reply:
———
Good point. The end of quarter window dressing will be big at the end of the month.
September 18th, 2009 at 8:02 am
This is one of those you may win the battle, but Mish wins the war. Greenjeans had to reduce rates to 1%, and Ben even further to zero. OK…we pushed on the string for a time. But the build up in structural long term debt is the 800 pound bear in the closet. There have been nice posts on the amount of debt required to produce an increase in GDP, and other statistical warnings about the decay in society this long term debt burden produces. So what happens when we have a “normal” fed funds rate? Any guesses?,….I suspect Mish has one..
September 18th, 2009 at 8:17 am
BR: People are responsible for their own behavior, futures, retirement, etc. I spent a good few years warning about hosuing, credit, low interest rates, derivatives, etc. A small handful of us did, and we were roundly mocked for it. And to add insult, the masses ignored the warnings anyway and lost tons.
————–
That’s what you think and what many if not most Americans think. But there are many other shcools of thought when it comes to free will. You think you are in control but research has shown that we are not who we think we are. You are a product of your genetics, upbringing, past events, past emotions, environment… And your subconscious mind makes way more decisions that your conscious mind.
You can’t expect others to understand what you were explaining if they did not have what it took to grasp your vision. And when you look at personality types, you’ll see that maybe 5-10% has what it takes to analyze the way you do.
And we are not led by those types.
September 18th, 2009 at 8:25 am
Mutual Fund flows show too many retail people are flooding into bond funds and out of equity funds.
—————-
Actually, bond funds have drastically increased their holdings of corporates so the retail investor is massively invested in risk right now.
September 18th, 2009 at 8:30 am
So what happens when we have a “normal” fed funds rate? Any guesses?,….I suspect Mish has one..
——-
Imagine if rates go up. In Canada, where mortgages are renegotiated every 5 years max and annually for probably 40% of households right now, it would be ugly.
So if rates need to go up but our central bankers decide not to increase them because it would be too ugly, it would mean carnage because there is no free lunch in aggregagte forever.
September 18th, 2009 at 8:36 am
I can feel it coming. Something we’ve never seen before: a minus 1000 point decline in the djia in a single day. Will it be a bottom ? I dunno. Yikes!
September 18th, 2009 at 8:55 am
recommended –
http://www.ritholtz.com/blog/2009/09/1121-in-the-sps-a-key-level/comment-page-1/#comment-216866
September 18th, 2009 at 8:58 am
We are getting further out on a branch that cannot support us much longer. Sure, the leaves and flowers on the end of the branch look pretty, and we’re drawn to them. If we’re focused too much on them, we’ll missing the cracking sound behind us.
I believe that the correction will be massive, it will be global, and long-term…a megashift.
September 18th, 2009 at 9:09 am
Megashift? What if 8/2000 and 10/2007 constructed a double top?
Of course, 10/2002 and 3/2009 could have constructed a double-bottom.
However, with what I believe is pan-economic fundamental weakness, and a reluctance of government and people to allow the market to correct itself, my vote is on the side of the double top and that is scary as hell.
Get your personal financial “house” in order asap.
September 18th, 2009 at 9:18 am
And for all you bulls out who are completely blind to reality. Reality is that the US market has totally sucked!
YTD:
DJIA in Cdn $: -2.3%
S&P500 in Cdn $: 3.6%
TSX: 31%
September 18th, 2009 at 9:20 am
Good debate, you have both been right about so much. My thanks to you and Mish, and have a peaceful holiday.
“Megashift? What if 8/2000 and 10/2007 constructed a double top?”
Steve Barry’s scariest chart in the history of the world..
September 18th, 2009 at 9:22 am
Lots of great insights !
There is too much tension in the system, (as in opposite forces acting on each other with no effective output), too much inequality (globally) and speed (everywhere), not enough transparency and justice.
I’m with Globaleyes, we are going to trip the breakers soon.
I’m sticking with DJIA 3600, or less.
Then 50/50 war or civil unrest, depending on where the boogeymens in charge want us to go die.
September 18th, 2009 at 9:39 am
“3) Sentiment has not (yet) reached extreme levels;”
What time frame are you looking at? Intermediate term, the sentiment models I watch are either at extreme levels, or retreating from extreme levels (which is actually more bearish that sentiment being at extreme levels)
I agree momentum and the trend is up, so I’m not selling the farm (currently 70% long), but now is a good time to play a little defense.
September 18th, 2009 at 9:55 am
I really appreciate both of your guys’ insights. You guys run two of the best economics / financial blogs anywhere. I think the risks are too high for individual investors to be trading on their own right now because there is so much uncertainty and govt involvement where the rules are constantly changing. So unless you can afford to pay a professional money manager with a good track record, like Barry or Mish or someone else, I’d say keep your money in cash and a little bit of gold.
September 18th, 2009 at 10:07 am
like Barry or Mish or someone else, I’d say keep your money in cash and a little bit of gold.
———–
As Zvi Bodie would say: if you need equities to reach your goals, then you should not be in them.
That’s the paradox of our times!
September 18th, 2009 at 10:09 am
Daily Commentary Friday, September 18, 2009 AM
Over the past two weeks, the major market indices have been redolent of the Energizer Bunny slogan, it just “keeps going and going and going.” Since the September 2nd close, equity markets have rallied 8 out of 10 sessions in an upside jaunt that has carried all of the major market indices to new highs in the advance dating from the March lows. As discussed in recent reports, shorter term breadth and momentum measures have depicted extreme overbought conditions that often precede a near-term pullback or consolidation period. Did Thursday’s down session mark the end of a sharp ten session rally, and the beginning of an overdue shorter term corrective move in the intermediate term advance? Time will tell, but Thursday’s session only showed nominally weaker character than recent sessions.
A lack of expanding Demand along with a commensurate contraction in Supply can be found looking at some of our shorter term measures. Of particular note are non-confirmations evident in Lowry’s NYSE and NASDAQ 30-Day Net Moving Averages of Net Advancing Issues, Net Points Gained, and Net Upside Volume that are all below their late August peaks. Our 30-Day Up + Down Volume metric is also showing a sideways traverse since early September indicating a waning of buying interest may be taking place.
Market internals did weaken in Thursday’s relatively choppy trading as compared to those seen earlier this week. Total NYSE composite volume was heavy near 6.8 billion shares, above its 30-day average of 5.75 billion shares, but below that seen on Wednesday. Total NASDAQ Volume was also heavy at 2.8 billion shares, above its 30-day average of 2.2 billion shares and near Wednesday’s relatively active level. NYSE Up Volume succumbed to Down Volume which accounted for about 55% of Up/Down Volume. NASDAQ Down Volume was a bit more predominant, coming in at about 64% of Up/Down Volume. NYSE breadth was also weaker than recent sessions, approaching 3 to 2 negative, but the NASDAQ showed a near even Advance-Decline ratio, although still slightly negative by a few issues. Our Short Term Buying Power dropped 1 point to the 79 level.
Despite all of the major market indices showing losses in Thursday’s trading, our longer term measures of Supply and Demand did not see weakening as witnessed by 1 point increase in Buying Power along with flat Selling Pressure. Since the September 2nd low, Buying Power now shows a net increase of 20 points from 116 to 136 and a 38 point increase since the Buying Control 1A (BCIA) signal was registered on August 4th. Selling Pressure has declined by 41 points since the BCIA signal and has dropped 22 points since the September 2nd low. While the increase in Demand is not perfectly correlated with a symmetrical drop in Supply, the relationship is nonetheless supportive of the Bull move, albeit with a slight lag in Demand. As long as the relationship does not show a sharp increase in Supply, the probabilities should continue to favor additional upside in equities over the upcoming weeks.
In sum, the market indices continue to appear extended on a shorter term basis with various oscillators and momentum metrics at extreme overbought levels. In addition, there are several non-confirmations that exist in some of Lowry’s shorter-term measures (30 Day Nets) of Supply and Demand that often precede corrective moves. However, absent a notable increase in Supply, any near term pullback or consolidation period has the probability of representing a brief pause within an intermediate advance. Whatever the odds are for a shorter term pullback, there are no signs of an impending major market top. Also, it should be noted that if the trend in our Supply/Demand measures continues to improve, the 4th and final Supplemental Buy signal will occur on a rise in Buying Power to 138 or higher along with a corresponding drop in Selling Pressure to 817 or lower.
F.P. Powell, CMT / Richard A. Dickson
September 18, 2009
September 18th, 2009 at 10:13 am
there are no signs of an impending major market top.
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LOL. It’s like sitting on the beach, oblivious to the coming tsunami.
Tops are always like that. If the market saw something negative, it wouldn’t be going up.
September 18th, 2009 at 10:16 am
if nothing is for sale now, then everything will be for sale when the time comes.
trading is about making money, not being right about your economic stance.
Barry and Mish are both right. they agree that this bounce won’t last. no one can nail every turn.
in trading, you cares about the final destination, you make money on the path.
this market has gone up much higher than i thought too on this bounce, i hope Wanger sticks around to give us his thoughts once the worm turns. somehow i doubt it. we need a few more Wangers here actually, it’s becoming a bearish eco chamber. need to hear from the other side …
September 18th, 2009 at 10:17 am
“there are no signs of an impending major market top.”
and there were no signs of an impending market bottom in March either.
September 18th, 2009 at 10:32 am
Each of your five points giving reason why the market has more upside are entirely debatable…
1) Individual investors remain under-invested because they’ve been crushed by a credit system no longer willing to supplement their shrinking real incomes, a problem made more acute by rising unemployment.
2) Market Breadth is highly suspicious (see Draining Capital From a Dead Asset Class), and certainly is not as positive as you claim (this is particularly true on NASDAQ: the U.S. stock market’s trend-leading exchange). Momentum has been fading for months. Indeed, the “alarm bell” announcing a pending top sounded early-July. Subsequently, coincident momentum has failed to exceed best levels prior to the alarm (as one would expect, thus confirming the validity of the signal). And your free bonus: the market climbs a wall of worry reflected by an increasing volume of shares offered up for sale over the course of an advance — precisely the opposite of what we’re seeing.
3) Sentiment was terrible last September and October. Still, the market collapsed.
4) The question is whether the broader investment community “believes” a recovery is upon us, or rather hopes one is. My contention is that the increasing tendency to hold positions rather than sell positions suggests a growing measure of desperation following last year’s throttling. Thus, hope is consuming the broader investment community, not belief. Were it otherwise, the volume of shares behind long bids would be increasing, not decreasing.
5) One easily could side with that portion of the “composite of prior cycles” wherein the present rally rates as over-extended.
Per the recession – depression debate, I’ll go further. We’re in the early phases of a physical breakdown crisis not at all unlike that which consumed Weimar Germany in a hyper-inflationary bloodbath culminating in 1923. As proof of a destructive component existing in the present monetary aggregate I find it in three words: dash for trash. Were the underlying physical economy functioning anywhere in the ballpark of “normally,” this sort of thing would not be happening. Indeed, firms whose stocks are benefiting from the dash for trash would be allowed to go bust. That they’re not — and, likewise, that prosecution of criminal activity involved in the creation of the greatest credit bubble in all recorded history has been restrained entirely — suggests the present period is one where time is purposely being afforded those in the know who rightly will offload the riskiest asset class — equity — on those whose analysis sees the present economic condition merely recessionary.
September 18th, 2009 at 10:37 am
I continue to think the comp will take a run at 2200. More to the point if you’ve been hanging around here and werent on the short side last fall, and havent made money off the Nov or March lows on the long side you should find a new hobby.
September 18th, 2009 at 10:37 am
This is all really irrelevant. Using data which was successful over the last few decades is not relevant for determining future direction of financial markets. Forecasting in a time of such substantial volatility is very limited. Using sentiment or other anecdotal indicators is no different than using economic indicators which may have given some indication of the future economy. All one can do is trade the trend until we see the next major crisis. And no one can predict when those will happen. So anticipating what will happen in a month or two or three is really voodoo be it up or down. So both analyses are generally useless. ie, You are debating a senseless topic with senseless logic. We will know the next high risk time when it presents itself. Just as we knew the high risk time in 2008 only when it was upon us. I saw a collapse was possible only days before it happened and reported it only then. If anyone can predict the future as far in advance as the two of you are debating to the granular level of knowing when rallies will or will not fail, then I want both of you to buy me the winning lottery tickets. This is typical of the gambler’s mentality so prevalent with finance personalities. Neither of you will ever consistently be right so what’s the point?
September 18th, 2009 at 10:40 am
Looks like the market is trying to get gold back under $1000 before the weekend. Heavy selling of 5y, 10y and 30y pushing the USD higher (esp since it almost broke below $76 yesterday). Pero esta temprano (yo necessito practicar mi español mucho).
September 18th, 2009 at 10:50 am
Think about Jeremy Grantham’s prediction back in March or April about where liquidity would push us. That man reeks wisdom.
September 18th, 2009 at 10:59 am
While Barry and I agree on most points, the most obvious disagreement is the economic growth, he is absolutely correct in his statement regarding the market and the economy. As long as we continue to see great/improving economic numbers as we’ve seen for the past few weeks now, there is nothing to change the psychology in a big enough manner as to move the market. Especially when taking the disconnect into effect. It would take a major event, economically, to bring the market down from here. I can’t see that happening at all (black swans aside but that could happen in the greatest economy at any time).
As I stated on Wed, I expected a couple of flat days to end the week, which seems to be where we’re heading, and then a nice base to run off of next week. I think 10k goes quickly and we’re clear on Dow to 10,300 area before any semblance of resistance.
September 18th, 2009 at 11:33 am
its not about guessing… its about working hard and getting invited to the right parties
September 18th, 2009 at 11:45 am
@ jturner at 9:55 am
“I think the risks are too high for individual investors to be trading on their own right now ….. So unless you can afford to pay a professional money manager with a good track record, like Barry or Mish or someone else, I’d say keep your money in cash and a little bit of gold”
Couldn’t agree more.., I went with Barry and Mish last October, keeping back some cash and acquiring some physical gold.
September 18th, 2009 at 11:54 am
Here’s some straightforward data re the econ cycle and the S&P 500. The National Bureau of Economic Research says the last recession officially ended Nov. 30 2001. Also according to the NBER the current (or recently ended?) recession began on Dec 1, 2008. So we had exactly 7 years of growth. From Nov 30, 01 to Dec 1, 08 the S&P 500 was down approximately 28%. Since the current recession was announced the S&P500 is up 31%.
This is why I believe you need a methodolgy that is adaptive, flexible and rules based, focusing on what is, rather than predicated on forecasts of next quarters GDP number, company eps guidance, etc.
September 18th, 2009 at 12:18 pm
[...] much more room does this rally have to run? (Big Picture, Wall St. Cheat [...]
September 18th, 2009 at 12:29 pm
“there are no signs of an impending major market top.”
The market has reached a permanently high plateau.
September 18th, 2009 at 12:44 pm
Entiendo ahora. They are selling UST to keep a floor under the market as the dollar rallies. Usually with the dollar up this much the S&P is searching for new lows. My .02
September 18th, 2009 at 1:10 pm
“it’s becoming a bearish eco chamber. need to hear from the other side …”
You can get all that you can stand at CNBC. No scarcity of bullish talk there, especially from Cramer, I’m sure. (I can’t partake; makes me nauseous as they fiddle while Rome burns)
September 18th, 2009 at 3:19 pm
Someone mentioned volume dropping. However it is only dropping relative to where it’s been in the last twelve months–which is abnormally high. If you go back further and look at total volume on the NYSE in ‘07 or before, you will see we are still well above “normal volume”. It is certainly less the the massive volume numbers we’ve conditioned ourselves to lately.
Rosie asks in his morning missive, “who is doing the buying”? and points to the equity mutual funds having outflows of $1.33 bln last week while bond funds had $8.2bln inflows… Corporate insiders are net sellers. Companies are not really buying back stock… He places it on program traders, short coverings and PM’s trying to catch up. This is why we could still have more upside. If the retail investor (always last to the party) actually shows up and starts shifting back into equity funds, we’ve got more fuel to the upside.
Doesn’t need to be rational, logical, fundamental…just people afraid that once again they’ve zigged when they shoulda zagged. Like switching lines at the grocery store–whichever one you pick is the wrong one, and it will always be that way.
September 18th, 2009 at 6:00 pm
I regressed the gain over the last five months, the S&P 500 is going about a 40-60% rate (annual basis). I regressed the estimated S&P earnings from now until December 2010, the earnings are predicted to increase at a 25 -30 % rate (annual basis).
If you believe the estimated S&P500 earnings are correct, there is more rally to go with S&P stabilizing at a 25% annual rate.
If you don’t believe estimated S&P500 earnings are correct and are decreasing, then rally will run until reality comes. The reality is the secondary effects of the credit crisis to dissipate throughout the economy.
September 19th, 2009 at 3:59 pm
[...] Barry Ritholtz and Mike “Mish” Shedlock debate whether this rally still has legs. Not surprisingly, [...]