The future is, by definition, unknown and unknowable. This is one of the factors investors must constantly wrestle with.

Forcastors are folly, predictions are unreliable. There is an old yiddish expression Mann traoch, Gott Lauch — which translates as “Man plans, God laughs.”

History may not repeat itself, but it often rhymes. When dealing with unknowns, we attempt to find as many parallels, as much evidence, the cleanest data we can, to make the most informed investment decisions. Outside of the house, the persons with the best odds in the casino are the card counters.

Which brings us to today’s market action. Is it the start of a consolidation, or is it the end of the rally?

The honest answer is we do not know yet. There is some evidence that after a long run upwards, the market needs to consolidate, to catch its breath, to build up the supply of cash to drive prices higher. Consider the 1974-75 rebound rally (75%), which followed the brutal 1973 year selloff (45%). There was a significant consolidation period that lasted from the end of 1974 to the middle of 1975. Are we entering a similar period?

Perhaps. But there is also data that suggests the rally is running out of energy. Strength has become selective, the Advance/Decline line is weakening; Narrowing rally breadth can often lead to a correction. Since January 4th, the bulls have been unable to produce a convincing rally. There are higher levels of churn. The percentage of stocks above their moving averages are deteriorating. Sentiment, as measured by the put/call ratio, investor surveys, has become complacent.

And the noise from various Fed governors tell us that the massive accommodation of ZIRP will not be with us forever.

However, while each camp can produce plenty of evidence supporting their views, I am unable to say either side is convincing. There simply is not enough data to make the call that the run which began in early March is over — at least not yet.

As of right now, the jury is still out . . . I expect we know a little more by the end of today.

Category: Markets, Technical Analysis, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

35 Responses to “Consolidation or Rally’s End ?”

  1. investorinpa says:

    That’s my sentiment too…I really wish there was a stronger indicator or a set of circumstances to say “HEY, market is still gonna go up” or “HEY, they are gonna pull the funding that is driving up the market”. A serious policy screwup can make this rally end quickly, but as we all know, policy takes time. I’ll just say whoever ends up being the best market caller for 2010 will be getting it right based on pure luck and not prognostication. There are a lot of bulls on one side, a lot of bears on the other…maybe that’s why the market keeps going up?

  2. investorinpa says:

    As an FYI, I know the AAII or whatever group said bullish indicators are high..but so are bearish ones too, based on the prominent bears that are out there saying this rally is going to end. Both sides are very visible

  3. Charles Maley says:

    Once again it seems like the gurus have a general consensus that the March lows are the final lows for this bear market. Since I am not in the prediction business, I will not say, but I will pose a question. What if they are wrong? It’s not like they haven’t been in the past. If they are wrong, how bad could it get?

    http://viewpointsofacommoditytrader.com/970/what-if-this-bear-market-is-not-over/

    It is tough to make predictions, especially about the future. – YOGI BERRA

  4. Big potentially Bearish development Monday, January 11th, 2010. This one could be a biggie. The Daily VIX fell and closed below its bottom boundary 2 standard deviations Bollinger Band Monday. The VIX fell to 17.55. The bottom Bollinger Band came in Monday at 17.70. Now this is not the sell signal. It is the set up for a sell signal. Once the VIX rises back inside the Bollinger Bands, above the bottom Bollinger Band, we will have a sell signal in the VIX. The chart at the top of the next page shows this set up situation.

    Are sell signals in the VIX reliable and significant? Oh yes they are. Sell signals from the Daily VIX are rare.

    The first sell signal was set up on September 18th, 2007 when the VIX closed at 20.35, below the bottom 2 standard deviations Bollinger Band at 20.63. The actual sell signal came the next day, September 19th, 2007, when the VIX rose back inside its Bollinger Bands, above the bottom band (which was 19.97), at 20.03. What happened next?

    Well, a multi-month plunge occurred over the next 3 months, annotated on the chart with a purple arrow.

    The second signal was set up on May 15th, 2008, when the VIX fell to 16.30, below the 2 standard deviations Bollinger Bands bottom boundary which came in that day at 16.86. The sell signal came the next day, on May 16th, when the VIX rose back inside the bands, above the bottom Bollinger Band’s 16.43 level, to 16.47. What happened next? The most devastating stock market plunge in 80 years. We show that plunge with a purple arrow on page 4

    There was another sell signal in the VIX on February 27th, 2008, that led to a sharp, but brief 1,000 point decline in the Industrials. On February 26th, 2008, the VIX came in at 21.90, below the bottom Bollinger Band at 22.22. The next day the VIX rose back inside the bands to 22.69, with the bottom BB coming in at 21.81. Stocks then plunged. There were a couple of sell signals in the spring of 2009, one in April and one in May. Both produced minor declines of several hundred points.

    So, get ready, Bears. Those are the only sell signals we could find over the past three years, and they all did major damage. We are at a very dangerous juncture. If we get a sell signal over the next few days, it does not mean stocks cannot rally another 2 to 4 percent before dropping hard. But it means there is a very good chance that prices will be substantially lower than they are the day this coming sell signal occurs, several months from now. After the September 19th, 2007 sell signal, the Industrials rose another 350 points to an all-time high a few weeks later, but then plunged, giving up that marginal gain and a whole lot more very quickly.

  5. Greg0658 says:

    but Hugh .. isn’t that insurance a product that folks know is a reverse reverse phsy out and a signal .. btw do you sell vix instruments?

  6. Marcus Aurelius says:

    All things considered, publicly-traded American companies, generally, are not worth their current valuations (by whichever tortured methods and metrics one might use to determine a fair value, nowadays). With the market hovering with no rational or realistic means of support, it seems like a lot of people suddenly believe in magic. It might not be imminent (in a measure of weeks or months), but the mother of all corrections is coming.

  7. catman says:

    Never short a dull market? Seems to me Reducing Risk is both the order of the day and the markets current driver. There is a certain psychological fatigue after the long unabated/uncorrected upswing we’ve had and no one wants to give back all of what they’ve gained by taking on more risk. Personally I’m quicker to take a profit just now.

  8. wally says:

    “All things considered, publicly-traded American companies, generally, are not worth their current valuations (by whichever tortured methods and metrics one might use to determine a fair value, nowadays).”

    Yesterday’s rules, yesterday’s logic. You are looking back to an era when people bought stocks based on future earnings potential, but that is not today’s market. The lower interest rates go, the more capital is mis-allocated and there is great historical correlation for that. Today’s stock market is a pure speculative play and nothing more.

  9. [...] supporting their views, I am unable to say either side is convincing,” Barry Ritholtz writes at The Big Picture. “There simply is not enough data to make the call that the run which [...]

  10. crosey says:

    Yep, and this is why you place stops. Per SPX, we’re past the 50% fib retracement, and approaching resistance prior to the Lehman gap. And with volume continuing to drop, it’s a good time to preserve capital….and sleep well at night.

  11. wunsacon says:

    This just in:
    “The future is uncertain and the end is always near.”

    (Wow. I didn’t know Jim Morrison was a permabear.)

  12. Steve Barry says:

    Crazy thought…what happens if market starts to tank…in the past, the fed would lower rates to stop the carnage or buy futures. That stuff is all done already. They are devoid of all ammo. Nasdaq bullish levels are insane and most top Nas stocks have very little short interest that could cover and stop a free-fall. All this and Hussman is on record saying conditions are in place for abrupt market declines (bullishness, overbought, valuation, 10 yr rising). Should be interesting.

    http://stockcharts.com/h-sc/ui?s=$BPNDX&p=D&yr=3&mn=0&dy=0&id=p52576604621

  13. Sweden says:

    I don´t think I can rember when I read something positive on this blogg. Still, everything mearly related to stocks is bullish or extremely bullish…..

    Almost all production, but only a minor part of the consuming is being moved to Asia. Short term uptick in margins. Left in the consuming part of the world is unemployment. It is very difficult to se that companies are going to return to profits seen in 2007-2008 later this year and going into 2011.

    I now understand that this is a game of money flowing into, and leaving the system. Thats it. When the shift from momentum to fundamenta comes this will turn really ugly.

    I think the time has come…..

  14. rootless_cosmopolitan says:

    You guys are still talking too much.

    Just some consolidation. My quantitative trading program told me so.

    rc

  15. wrongway says:

    So, it unanimous then. Market is going to tank. Other than investorpenia and BR who are neutral (at best) every single post above this one has been bearish or massively bearish. Seems like the same sentiment that I have been reading on this blog since the rally started in March. Does anybody on this blog ever have bullish sentiment? Hello? Anybody?

    ~~~

    BR: Just your host . . .

  16. Greg0658 says:

    “You guys are still talking too much”
    waiting for the hall to call to clean up the steets / or that shovel ready pyramid project
    in the mean time eating bonbons watching the soaps on CNBC CNN MSNBC and sometimes my finger slips into FOX … and my fav TBP .. dreaming of my big comeback all on my own

  17. DL says:

    As always, it’s a question of time frame. From the perspective of the next 30 days, I’d say the rally has run out of steam. But from the perspective of the next 6 months, it has not.

    And from the perspective of the next 5 trading sessions, I’d say we’ll retest the recent high.

  18. HarryWanger says:

    If we get the SPX to close below 1130 we’ll go right back to that amazing resistance at 1097. Otherwise, it’s just another small drop on its way to the 1190-1200 level. I went into SDS yesterday at 33.35. May be a quick trade if the downward pressure doesn’t follow through.

  19. drey says:

    I’ll ask again, Barry.

    Are you prepared to come right out and say that the secular bear market is over?

  20. DL says:

    The secular bear market is not over. But that doesn’t mean that one shouldn’t be long at the present time, or next month.

  21. ab initio says:

    drey

    no one that manages money professionally or prognosticates on tv will be categorical on any market call. they need enough wiggle room to claim they were on the right side of the trade. the only thing that matters is how did their portfolio do across some period of time and in both bull and bear trends. now this is a generalization and I don’t know enough to make any kind of assertion on BRs calls.

  22. rootless_cosmopolitan says:

    drey, or anyone,

    Are there any arguments in favor of the believe the secular bear market was over? If yes, what arguments would that be?

    rc

  23. drey says:

    I agree, DL, but our host has been uncharacteristically coy the last couple days and I’d like to hear his opinion.

    Barry?

  24. drey says:

    “Are there any arguments in favor of the believe the secular bear market was over?”

    Not that I personally find convincing, RC.

    Care to weigh in, BR?

  25. rootless_cosmopolitan says:

    drey,

    I agree. I can’t come up with anything substantial, either. But maybe this is just due to a cognitive bias on our side. I am very curious, what arguments would be in favor of the notion a secular bull market started in March 2009. Someone? Anyone?

    rc

  26. DoctoRx says:

    Barry

    I think you are referring to the 1976 consolidation. After an amazing about 15% move in a few weeks at the start of 1976, the Dow went nowhere all the rest of the year. Then hard down in 1977. 1975 was largely straight up, a classic V reversing the 1974 V down.

  27. insaneclownposse says:

    I like to watch the BTK because it’s a good measure of the hot money coming into or leaving equities. It usually leads the rest of the stock market. It’s still holding up fairly well. Also, because I feel like we are in a cyclical bull, the other thing I’m looking for at the beginning of any serious downtrend is a sharp break in the indices and then a blast to new highs before the bottom drops out. This setup was illustrated in late summer/early fall of 2007 and happens repeatedly throughout history because overeager shorts consistently pile in at the start of a bear market and then get blown up by experienced traders in the futures pits.
    I’m in the Marc Faber camp which believes that any market pullback will be shortlived because of Bernankes money printing skills. If the indices get seriously hit, there is no doubt the presses will be cranked up yet again. Liquidity factors have to be taken into account.

  28. CTX says:

    okay, so what do you think, consolidation? let us know what you think

  29. [...] TARP, Technology, Washington – As the market embarks on another earnings season, Barry Ritholtz wonders if this is merely the start of a consolidation, or the rally’s [...]

  30. van schaik says:

    Sure, the future is “unknowable” but I still predict the bear is back, or soon will be, for stocks and gold. Even the economic recovery will not put Humpty Dumpty back together again for quite a few years. It’s not the end of the world. It’s not even the end of life as we know it, although negative hyperbole tends to attract a lot of attention. It is just the end of a long term expansion and the beginning of, if we are lucky, a major consolidation. If we are unlucky: It’s the beginning of a major contraction. But you have to admit we all knew the piper was going to eventually hand us the bill. http://jpetervanschaik.googlepages.com

  31. call me ahab says:

    “Does anybody on this blog ever have bullish sentiment? Hello? Anybody?”

    ~~~

    BR: Just your host . . .

    _______________________________________

    alright- change the goddam blog already to analysis and support of a Bull Market- quit dicking around-

    come out of the closet- COMPLETELYand start posting all the anlysis that support the Bull Market case- not just short term- but why “good times” are ahead-

    where are these posts- where is the anlysis- where is the explanation- that lets your readers know your new position as a Bull- not just a p/t while it last’s Bull- but a secular Bull-

    stop leaving the bread crumbs for people to follow so that you can deny later if the market turns against you-

    the truth shall set you free- jesus

  32. DiggidyDan says:

    I certainly hope it’s a corrective move. I’ve been selling some equities lately since october, when I thought it was gonna turn and have a huge pile of cash sitting here waiting patiently for the next obvious move. I said we are in a type of wait it out no man’s land back then and getting into more cash, taking gains, and playing it safe would be prudent, as the remaining capital gains to be made at the time don’t justify the potential risk of a correction or another crash down:

    http://www.ritholtz.com/blog/2009/09/thursday-reading-2/#comment-218893

    http://www.ritholtz.com/blog/2009/09/friday-reading-2/#comment-219427

    http://www.ritholtz.com/blog/2009/10/one-day-wonder/#comment-231011

    I was wrong on the exact Turning point in October, but the range for that point is still valid. I will continue to wait until I see a new direction in which to make a less risky play than the 3% MM yield and Tips I have been stacking up during this time. Preservation of capital as opposed to “missing the rest of the rally” is more important to me currently. Additionally, my own quant indicators based upon Tobin’s Q and Shiller’s CAPE have moved back to the Market is overvalued overall in the last quarter. I could very well be wrong as it moves yet higher, as I was wrong in October, but as I said then, I can’t justify the risk for the upside I see until there is an obvious answer.

  33. The future has already happened. We just haven’t admitted it yet.

    - me

  34. rick-again says:

    a first time poster…..I am reading that many are protecting capital or reducing their long positions
    Is some SH along with cash a safe way to go. Will SH value hold up if it takes 6 months for the piper to be paid.

  35. First, How the common man sees it: Great quote! I liked it a lot.

    Some technical analysis…In addition to the A/D line, I examined the S&P 500 vs. RSI Reading of 70 or higher. In the chart of the S&P 500 and the percentage of stocks within the S&P 500 with an RSI (14) reading above 70.

    You can see the huge spikes up in the percentage of stocks within the S&P 500 in May, August, and September. Those spikes also corresponded with higher highs and higher percentages of stocks each time a new high was made.

    When it is lower than 70 and the market makes a new high, this marks a negative divergence. Examine the recent highs in the S&P 500 and the percentage of stocks with an RSI (14) above 70. The percentage of stocks with a 70 reading is dramatically less than the other spikes, and yet the market is making new highs. This divergence demonstrates weakness in the market.

    Chart: http://www.graspthemarket.com/elliottwave/20100104a.php