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Santoli: Pullback or Crash?

Posted By Barry Ritholtz On March 20, 2010 @ 8:29 am In Contrary Indicators,Technical Analysis,Trading | Comments Disabled

[1]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 [2] 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 [3] and the Federal Reserve analysis [4] 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 [5] 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 [6] 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 [6]  (October 8th, 2009)   

Down, But Not Out [7]
Barron’s March 22, 2010  

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2010/03/santoli-pullback-or-crash/

URLs in this post:

[1] Image: http://www.ritholtz.com/blog/wp-content/uploads/2010/03/1004-cover-300.jpg

[2] Consumer Metrics Institute real time daily economic data: http://www.ritholtz.com/blog/2010/03/will-consumer-demand-falter-in-q2/

[3] AAII survey: http://www.ritholtz.com/blog/2008/11/individual-investor-stock-allocations/

[4] Federal Reserve analysis: http://www.ritholtz.com/blog/2010/03/household-equity-exposure/

[5] Annie Leibovitz cover photo of Michael Douglas: http://www.vanityfair.com/hollywood/features/2010/02/wall-street-spotlight-201002

[6] armageddon trade: http://www.ritholtz.com/blog/2009/10/the-most-hated-rally-in-wall-street-history/

[7] Down, But Not Out: http://online.barrons.com/article/SB126903945323364875.html

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