Mike Santoli asks an interesting question this morning in his Barron’s column.

“The important question isn’t whether the market retrenches a bit, but whether that retrenchment would segue into a more definitive and momentous market top.”

This is a worthwhile query for exploration.

Mike calls a market pull back more likely than a top. He challenges da Bears to explain how a new top can form:

- During a broad rally, with “new highs swamping new lows?”

- While the LPL Current Conditions Index is at a post-2008 high?

- When credit spreads are tight and issuance of cheap corporate bonds and convertible securities rampant

- With percolating merger activity, and when Merrill Lynch bond strategists warned last week that “LBO risk” was on the rise?

- Do bull markets end amid public apathy toward equities? The typical investor has mostly shunned stocks, with outflows or weak inflows into stock funds the rule.

– With Vanity Fair magazine hyping the anti-greed sequel to the film Wall Street?

I will have to take issue with a few of Mike’s bullet points:

• The Current Conditions Index may be near highs, but the ECRI index has turned decisively lower. Further, the Consumer Metrics Institute real time daily economic data of the ‘demand’ side of the economy has been shrinking at an annualized rate of over 1.5% during the trailing quarter.

• Both the AAII survey and the Federal Reserve analysis of household total financial assets now shows they are at historical median equity exposure.

• I am less sure that a Annie Leibovitz cover photo of Michael Douglas in the celebrity obsessed Vanity Fair will qualify as a legitimate contrary indicator reflecting anything about he current market rally.

My own views are that this is a cyclical bull rally within a secular bear market, and that it ends with an approximate 20-30% correction, followed by a broader trading range. As of today, we see no signs that the end is imminent. However, the closer we get to the day when the market believe a Fed removal of accommodation is imminent, the closer we will be to the top.  Alternatively, once the current unwind of the armageddon trade encounters the heavier resistance of Dow 11,500k and S&P 1250, the upwards momentum is likely to wane.

Until then, the bias remains to the upside.


The Most Hated Rally in Wall Street History  (October 8th, 2009)   

Down, But Not Out
Barron’s March 22, 2010  

Category: Contrary Indicators, 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.

22 Responses to “Santoli: Pullback or Crash?”

  1. Jim Hodson says:

    The combination of shadow housing inventory, option ARM resets, and unemployment create headwinds for a broader sustained recovery in the near term. Although this is just one sector, it is one that hits “home” with everyone and in my local observation reduces the overall confidence of a broad category of investors who in prior years would be jumping back in to equities. The degree of any a sustained recovery therefore will depend on who is participating, and what their horizon is.

  2. Mr.E. says:

    I am largely with you. A couple of other factors worth considering:

    1. The broad market (S&P 500) has retraced 62% of the decline from May ’08 to March ’09, with a weekly close ever so slightly above that level. This market has shown a pattern of testing with resistance with a slight push higher that turns into a false break the first time, pulls back a tad on moderate selling (maybe profit taking) then reignites with renewed buying. The current “apparent” top may be another example of the same, or it may be the prelude to a more enduing turn, no way to know from a single day led by sellers.

    2. Seasonality – this is a mid-term election year, which often result in significant pullbacks from spring well into autumn, ending with a year low in the September-November time frame.

    3. Short-term seasonality – coming into earnings season, and during the rally over the past year the market tends to pullback going into earnings and then regain buyers support as earning reports unfold. A second short-term seasonal effect is that the last week of March is often negative (a lot of speculation as to why can be offered, but I’ll pass).

    4. While Dow 10,000 is largely meaningless (save the media) Dow 11,000 is not. More exactly, there is a S/R zone on the Dow in the range of 10,700-10,900 that has been a pretty consistent line of demarcation.

    5. Market is in a zone of conflict between intermediate-long term (daily-weekly) with a strong trend up, but at stretched levels in that time-frame and what I call the very long-term in a downtrend and price having reached continuing downtrend resistance in a somewhat stretched state. Until one f those two sides capitulates it’s a coin toss. If we see more selling next week the key levels I am watching on the downside for the S&P are intermediate trend support in the range of 1125-1115 followed by long-term trend support in the range of 1050-1075 (they’re dynamic and subject to daily and weekly change, respectively). So long as these hold the bias is up.

  3. quiddity says:

    My question is this. Where is the money coming from? (Both from March of last year to now, and going forward.)

  4. Marcus Aurelius says:

    “The End” can only be seen in the rear-view mirror.


    The money is coming from those who will consolidate their already lopsided holdings of America’s wealth — members of the Corporatist cabal. The money is created by the Fed, and distributed to the banks, the military/industrial complex, and those fully vested in globalist corporations. It certainly isn’t coming from the middle or lower classes, and it certainly has not improved the low-velocity aspects of this “recovery.”.

  5. b_thunder says:

    I think The Fed will never (not in our lifetimes anyway) be able to completely remove accommodation and return to the pre-bailout level (i’m ot even talking about going to the pre-Greenspan Put level)
    The 1.25T of crap MBS bought by the Fed, the Maiden Lanes, the future similar arrangement(s) for the commercial RE – how in the worlds are they going to dump all of that without major haircut?

    Bernanke has yet to acknowledge that the Fed was the trigger, the major aid and a participant in the housing bubble, how in the world can they seriously contemplate about taking away all of free money, and gettign rid of the “greenspan put?”

    And BTW, everyone is taking about what the NY Fed knew about “Repo 105″ and And about the failed stress tests, and why they’ve not done anything about it? Someone a the large audience has to mention that all that time Dick Fuld was on the board of FRBNY! Along with Jamie Dimon and Steven Friedman of GS fame?

    Do you still wonder why nobody reigned Lehman in after the failed “stress” tests in 2008? Why they gifted $30B+Bear Sterns to JPM and bailed GS by giving then $13B in AIG crime?

    The myth about Fed’s independence and honest dealing with Us, The People, has been shattered. Audit-schmodit, the Fed system needs to be totally uprooted and replaced with a genuine independent bank without ties to the industry!

  6. Jerry 369 says:

    I also agree with the downside bent. I seem to remember another time m&a and all the supposed stock buy-backs and all the other noise that comes with it. Oh yeah,that was at the top in2007. Most of those great buying deals,”of a lifetime” didn’t turn out so well. I think back to a stock we owned and was taken out and is just coming out of bankruptcy, Lyondell. Magnum Hunter also comes to mind….Be careful out there…
    P.S. An announcement to do a buy back is not the same as buying back stock. Buy backs always seem to look best when stock is up big,why no buybacks at the lows?

  7. icm63 says:

    Barry dude, just listen to your self. Dont ever say you live in a FREE country. Quote..”However, the closer we get to the day when the market believe a Fed removal of accommodation is imminent, the closer we will be to the top. “…

    So FED JUICE ON , market up, FED JUICE OFF, market down, this has been the game since 2000. Whats the difference between USA and Zimbabwe, only longitude and latitude. Thats all !

  8. TheMotherOfAllCasinos says:


    enuff said – forewarned is forearmed…

  9. dead hobo says:

    BR asked:

    Santoli: Pullback or Crash?

    Both or neither. It doesn’t matter. Barron’s will proclaim victory (after the fact, of course) with respect to it’s prognostication skills even if Martians attack.

  10. MarketSavant says:

    It seems the consensus view is that it will eventually end as the steroids wane and when that happens “I will be able to get out” with an eye to the exit. What happens when most think like this…20-25% crash in relatively short time frame to maybe 880 ish by the summer.

  11. impermanence says:

    As long as business leadership cares more about themselves then they do about the broader economy, you will witness the current obsession with market prices and the creation of net worth exclusive of societal wealth.

    What must people at the top feel like when they see their own riches against a back-drop of social decay. Personal wealth can only anesthetize the conscience so long.

  12. Mike in Nola says:

    The rally ends when the China bubble pops or starts deflating. It’s been propelling commodities, the other BRIC countries and emerging markets that have been selling to China, and our feeble exports. While the Chinese central bank lending has been a huge stimulus, it has drawn in a lot of hot money from the west that is helping to leverage things up even more.

  13. michaelismoe says:

    I am amazed that anyone really believes that the Fed will “remove accomodation” anytime in the next decade.

  14. soloduff says:

    Most of today’s posts, reflecting the consensus of the pundits, remind me of the old Sherlock Holmes question, Why didn’t the dog bark? Specifically, the consensus seems to share the Fed’s illusion about its own Keynesian omnipotence. ‘When the Fed removes the stimulus, the market will wane,’ etc. Richard Koo has even presented an attractive rationalization for a permanent Keynesianism for a permanently stagnant capitalism.

    Amazing. A country that can’t control the levees in New Orleans or its own pandemic of corruption is credited with control over its economic fate. This by a Fed that, by any honest account, did not know what it was doing in the run-up to the current economic troubles.

    Next thing, they’ll tell us that nuclear weapons and global warming are under control.

    I suggest that a bit of expecting the unexpected may be in order.

  15. This is what I said back in July 2009, almost 9 months ago!

    Back on July 28, 2009 I sent out a newsletter to subscribers stating the following:


    The S&P 500 200 day moving average increased compared to the previous day’s level for incredibly the first time in a year and a half! This has been one of the worst and longest streaks of consecutive days with a declining 200 day moving average and tonight that streak has come to an end!!!

    For all the naysayers out there who have been saying that this rally is not for real and that a confirmation signal was missing because the 200 day moving average was still declining, well that theory has now been negated!

    Following the end of this streak in the past, going back eighty years, the S&P 500 has averaged a return of an amazing 20% during the end of the prior five worst streaks; you can take that to the bank.”

    So back then in late July 2009 the S&P closed at 980 and went up as high as 1080. A 100 point increase in the S&P 500. However applying the historical data mentioned above, the end of this bull run should occur at 1180 which would be that 20% historical gain!!

    I don’t know for sure, but history seems to be on the side of a continued bull run!

  16. Mike in Nola says:

    soloduff: I don’t think many here believe that the Fed is really “controlling” anything; that becomes clearer every day. It becomes clearer eveAs Marc Faber has said, don’t underestimate the power of printing money.

  17. Mike in Nola says:

    Oops. This damn keyboard of my wife’s laptop is a pain. Keep hitting the wrong keys. What I had meant to insert after the first sentence was that the Fed is good at blowing bubbles, but not at controlling the results. It’s expanded its balance sheet enormously and printed trillions to repump Wall Street. And whadda we got? 10% unemployment and housing still collapsing. The Fed clearly doesn’t know how to withdraw its stimulus – and won’t. We’ll keep floating along and slowly deteriorating until some event happens. As I said, my money is on the Chinese bubble.

  18. rick-again says:

    Barry(or anyone) what does Barry mean by this

    “…this is a cyclical bull rally within a secular bear market…”

  19. Clem Stone says:

    Whatever happened to “3 steps and a stumble”? And for that matter, i seem to remember getting to about 17 steps before the stumble last time.

  20. Barry,

    The VF cover is worthless because it was on the editorial schedule to coincide with the expected release of Wall St. 2. (The movie been pushed back until September.) Therefore, it has been planned since the ad buys many months ago (probably sometime in the Fall).

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