As expected, the (second) Greek bailout is now approved (WSJ, NYT, Bloomberg, FT.com).

This rescue plan was widely expected — negotiations had been ongoing for several quarters (seems like years) and so a massive reaction is unlikely. Indeed, European Bourses opened positively then slipped modestly into the red. US futures are modestly higher.

Watch for a rally up thru 13,000, a possible pullback and consolidation, then more upwards movement.

Why is this? On occasion, big events can trigger pivot points in markets. Consider the downgrade of the US credit rating by S&P in Augusts 2011 — markets sold off, Bonds rallied. Then Operation Twist was introduced, and markets got excited again.

That is no coincidence. When we look at markets from a technical perspective, we see that they often run from overbought to oversold and back again. Lets use percentage of S&P500 stocks over their 200 day moving average as an example (See chart below). This is not a precise timing tool — it merely indicates how oversold we are at any moment.

It is no coincidence that when markets are extremely oversold, it induces government and central bank actions. Sometimes this results in intelligent policy, sometimes it looks like panic. Regardless, we can see how the deep oversold condition led to changes in policy that added liquidity to markets — one source of fuel for market rallies.

The post credit crisis sequence seems to operate thusly: Markets slide lower on weak fundamentals. They accelerate down on stop losses and risk management. They plummet on panic. Then intervention of some sort occurs. The experienced market/Fed watchers know the impact, and jump in. As markets move off lows, some value types, cycle historians,  and then technicians jump on board. The rally may be distrusted or even hated, but eventually trend followers then momentum boys join the party. Pretty soon, its all aboard the Love Train, and not too long after, markets reach their over bought condition. The cycle begins anew.

The March 2009 lows brought QE (some argue that QE brought the March 2009 lows, but that is getting the psychology backwards). It took less than 200 points of SPX losses and some punk economic data and fears of a double dip to give us QE2. Fears of an entirely separate recession (credit ECRI) and a 300 point, near 20% SPX tumble gave us Operation Twist.

If the past is prologue (and that cannot be relied upon), we could see a scenario something like this (Note: Wild ass guessing to follow).  Markets kiss 13,000, pullback and consolidate.  But they are not overbought sufficiently for anything more serious than a modest retracement, and so they continue higher for several months, until the % of stocks over 200 day MA is near 90% (they are at 75% today). That takes us somewhere between March and June. The next sell off begins, lopping 25% or so off of the SPX. The Federal Reserve waits until after the November election to introduce QE3, and the cycle starts anew.

What could derail this? An improving economy could postpone QE3 indefinitely. Fading profits could move the timeline up rapidly (S&P 4Q shows only 54% beat on EPS).

Regardless, the market picture for the next few months is going to be driven by the answers to the following questions: Is economic data confirming a recovery? Are profits at peak levels? Will the Fed sit tight or act?

Your expectations for the answers to these questions very likely determines your investment posture. Adjust accordingly.

>


Source: The Chart Store

Category: Federal Reserve, Markets, Psychology, Technical Analysis

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 “Here Comes Dow 13,000. Then What?”

  1. Bill Wilson says:

    I think today’s bailout announcement could be the catalyst for a 3-5% pullback. Buy the news, sell the weather. I am, of course, guessing.

  2. Northeaster says:

    “S&P 4Q shows only 54% beat on EPS” -

    Great.

    What about companies that had share buybacks to boost their own EPS, and layoff thousands (nowhere mentioned in the Press), specifically IBM? Someone had to pay for that $170 Million Dollar parachute right?

    http://www.sec.gov/Archives/edgar/data/51143/000110465911012713/a11-2531_1def14a.htm#a2010PotentialPaymentsUponTermina_054654

  3. NoKidding says:

    Top chart:
    QE1… QE2… OpTwist…
    Clear display of diminishing returns for intervention.
    Looks like some important bits of the market are improving, like initial claims and foreclosures, but the actual market will take a while to catch up to the Potemkin market.

  4. dead hobo says:

    I have to agree that central bank liquidity cures all ails when issued during a liquidity crisis. In fact, in these modern markets (and possibly all prior markets) stock prices plunge only because of liquidity crises. I still haven’t figures out what causes the 5% to 10% pullback in these modern markets. HFT keeps the pressure high and appears to provide a strong bias upwards over time. The concept of overbought means a lot less when HFT is combined with central bank liquidity. I will be watching astutely for the next pullback / consolidation / retrenchment in order to look for a pattern. Last year, the S&P topped at about 1360 and went sideways, event though huge amounts of liquidity were present. Thus, even liquidity charged HFT appears to operate with a limit, but what?

    Now that Greece is settled, the ECB is planning another massive liquidity injection, Japan and England are on board the liquidity wagon, and China is trying to stop an asset bubble implosion with more liquidity, I think it’s safe to jump back in from going to 100% cash in mid January.

    Normally, I would agree about the pullback from 13000, but that logic does not work anymore. HFT + massive liquidity has made fools of us all in the analysis department. I’m trying to work out a new entry strategy. Rather than waiting for a significant pullback and then purchase a lot, I’m thinking out a pattern where I invest about 2x the dip on a percentage basis. For example, if the market falls 1%, I put in 2% on my total funds balance, or some variation. Then, at bottom, I maybe double the funds on account. Any feedback on this? I think it’s safe to assume the central banks have set a floor on all markets.

  5. Mark Down says:

    We got the bubble headed bleach blonde that comes on at 6:30.
    She can scare you about 6 dollar a gallon gas with a gleam in her eye
    It’s interesting when people pay more for gas.
    Give us dirty laundry….

  6. Patrick Neid says:

    Unless the market rolls over and plays dead right here I think a test of new all time highs is a given. What happens there is the real test. Myself, I assume we will have a false breakout and then a 25-30% correction into a low in 2014 ish. There is a great new bull market out there but I would be shocked, despite the trillions, if it has already started.

  7. dead hobo says:

    Addendum to post not yet visible …

    Then again, the day-after quarterbacks say the Greek deal may not last a week as Greece still needs to fulfill a few pre-conditions, a third bailout will likely be required in a year or two, and those pesky debt holders have yet to publicly make a statement. So, the 25% pullback may still be on the agenda due to liquidity vanishing into mattresses.

  8. Mark Down,

    for the young Grasshoppers who may be about..

    http://www.elyrics.net/read/d/don-henley-lyrics/dirty-laundry-lyrics.html

    “…You don’t really need to find out what’s going on
    You don’t really want to know just how far it’s gone
    Just leave well enough alone
    Eat your dirty laundry…”

  9. CANDollar says:

    So we can have consolidation around 13000 DOW 6%-10% more upside then sell off 25% to below 1125 SPX?

    The refiner problem is bringing a large premium into gas at the pumps. I think this scenario could depend on the mid east situation.

    Here in Canada the worry for our index is China.

  10. acme says:

    BR: can you share with us your long percentage? How much of a pullback are you anticipating? Many thanks.

  11. louis says:

    Who’s gonna buy all of our crap?

  12. mark says:

    25% sell off. Is that a 2012 forecast? Say hello to President Mittens.

  13. constantnormal says:

    As BR is on holiday, I wonder exactly when this post was penned … it could have been written weeks, if not months ago. Perhaps it will be recycled (with some adjustments to the numbers) months from now.

    I like the implicit question posed by today’s Quote of the Day in The Big Picture:

    “Given the renewed drop in the dollar and our expected continued downward trend in the greenback’s foreign exchange value, we would expect the prices of imported consumer goods to rise at a faster rate going forward. In the event, we would also, then, expect core consumer goods inflation to remain on a rising trend.”
    –Paul Kasriel, Northern Trust

    … Yes, that is EXACTLY what one would expect … and one would have expected it to have begun by this time, as we have been driving down the USD for Quite Some Time now … OK, why haven’t we been seeing imported inflation? And THAT is the question that the inflationistas need to be asking themselves …

    My own story is that we have not seen any significant imported inflation because pretty much every other nation on the planet is similarly engaged in destroying their own currencies. The Race to the Bottom is On.

    I suspect that unless there is a decisive winner in this race (and there is unlikely to be one), no serious global inflation will emerge from this … ever.

    However, this comes with a Cost, and that Cost is that neither will we see any robust global economic recovery … ever.

    ~~~

    BR: This morning at 5:30 am

  14. constantnormal says:

    One small correction/amplification to by previous comment:

    ” … and one would have expected it to have begun by this time, as we have been driving down the USD for Quite Some Time now … ”

    … should read:

    “… and one would have expected it to have begun by this time, as we have been driving down the USD for Quite Some Time now … somewhat ineffectually recently, as the EU’s self-destruction has been sending a tsunami of assets into the USD, but eventually, those waters will recede and the USD will drop some more …”

  15. rd says:

    Oil is positioning itelf perfectly in this scenario to suck disposable income out of the pockets of the consumers impacting the broader economy and corporate earnings just as the stock market is peaking (1974, 1980, 2008).

  16. Barry,
    Read this morning that Brent prices in sterling are now higher than they were back in the summer of 2008 (when WTI prices hit $147.27 per bbl) and in euro terms we are only 2% below those 2008 highs. With the price move this morning, WTI is back to its highest level since May 5th last year .

    Perhaps this could be the catalyst to accelerate your projection of a downturn as many underestimating the risk oil prices have to the global economic recovery – especially in one of the world’s largest economies- Europe!

    I enjoy your articles and postings.

    Best,
    Martin P.

  17. adid says:

    If the S&P500 is not overbought here at the 2011 highs, then the next important level is around 1440. This would mean a 25% rise from December – nothing out of the ordinary.

  18. mathman says:

    rd: and down the road a piece, we come to this

    http://thinkprogress.org/romm/2012/02/21/428900/climate-forecast-us-counties-face-risk-of-water-shortages-by-2050/

    Climate Forecast: 70% of U.S. Counties Could Face Some Risk of Water Shortages by 2050

    “Ye cain’t drank awl, so this ‘ere’s a prollum!”

  19. Greg0658 says:

    rd on oil “disposable income out of the pockets” thats the 1st thing caught my mind too
    - signing in it probably helped CNBC just did a segment of our oil desires/needs – KeystonePL decision/put off – the air in here heard me say ‘why dont the vampire squidies just stay home’ save the precious /then/ ‘ya right – those laborers need that work to feed the family’

    somewhere in them charts I had to deduce where my upcoming 5 year TBP anniversary was – the near 500 point machine induced 1 second drop 3rd print que day next Monday the 27th

    about the quote comment – had to go listen to Fiddlers Anatevka (I’m on a song kick too)

    but constants post got me to sign in with “Race to the Bottom is On” .. in a one world thats sorta where ‘Labor’ needs it – complete deflation for a refloat of ALL the tides under the boats

    on the thread question – maybe horse drawn carts for awhile – but I hope wind turbine charged electric engines – itd be a baby step forward from that combustable century

  20. Concerned Neighbour says:

    Count me among those who “hate” this rally. I like my rallies to be based on fundamentals and driven by heavy volume, rather than central bank induced and driven by vapor volume. I think it’s absolutely deplorable what the Fed has done to responsible savers. But I’m glad that everyone recognizes this rally for what it is (except the media, of course).

    I have never shorted an index in my life, and I’m very reluctant to start now given the Fed’s determination to inflate a new bubble come hell or high water. But I am sorely, sorely tempted. This perpetual upward motion machine of a market the Fed has created is beyond absurd.

  21. Pantmaker says:

    I think Barry is more than likely correct. The most thinly expected scenario here would be a rejection right here right now at 13000 followed by Barry’s 25% move down…I actually think it will be a deeper move down…but why split hairs. WMT is a big tell today….HD is a low hanging fruit short along with CAT and just about the entire retail complex.

  22. VennData says:

    A lot of people above “feel” bad and look to all be, metaphorically-speaking, on the same side of the boat.

    But let’s be real, no one knows what’ll happen next. However if you missed the Obama rally…

    http://www.usnews.com/news/obama/articles/2009/03/04/obama-says-buy-stocks-now-good-deals-there-for-long-term-investors

    … then what you can do is become a long term investor like the Commander-in-Chief advises (how positively Christian of him) set an asset allocation say 70% equities, 30% bonds. Split your equity among international, small cap and value. Only use ETFs or low cost index mutual funds, example: 30% VTI, 20% VXUS, 20% VBR, and 30% TIPs. Then once a year re-balance back to your original asset allocation.

    No mess, no fuss and you will outperform most of the “sailors” above every year, and assuredly beat them over the long run. The long run… say it with me “THE LONG RUN.”

    I have a new rule, wait to buy/sell individual stocks until after you read this, the whole thing…

    http://www.ritholtz.com/blog/2012/02/a-lesson-on-elementary-worldly-wisdom-as-it-relates-to-investment-management-business/#more-74623

    … if you can’t, then follow my advice above. If you can read it, you WILL follow my advice above.

  23. dumsperospiro says:

    “Here Comes Dow 13,000. Then What?”

    Profit-taking !

    (repeat)

  24. crunched says:

    The caveat to all this is there is no real, organic ‘recovery’, and meanwhile with each of these Fed/Oversold/Overbought ‘cycles’ you speak of… the market gets more overvalued each time. Eventually, finding itself at ridiculous levels triggering the kind of panic and selling even the Fed can’t stop, especially with the diminishing returns each QE is delivering… and with the debt level of the US growing higher every quarter.

    I would argue that QE1 is not what saved the market. It helped for sure… but the market was massively over-extended on the downside and had finally exhausted itself. If QE1 would have been implemented in Fall of 2008 I doubt it would have worked.

  25. J. Francis says:

    My own opinion is pretty close to yours BR, but one thing the market has not properly discounted to date is the potential the Syrian situation has in becoming a full-fledged civil war that draws in major military responses from Turkey, Israel, Iran, and the Saudis. Everyone seems to think it is merely a humanitarian issue at present but it could end up overshadowing the Iran/Israel meme and putting more upward pressure on crude oil and then on to CPI and slowing growth. This scenario is much more likely than an Israeli strike and I think it puts a 20% dent in the market if it comes to pass, Brent to $155ish.

    I still think this is a rangebound market, with down side at 1179 or so and upside capped at 1400, but to me the more interesting question is what happens if things don’t fall apart in the Middle East, Europe successfully kicks the can down the road until early 2013, unemployment drops to 8- 7.8% or so and we end up with annualized GDP growth around 3%. S&P to 1500 a la the Dec. Kass’ call or are we close to this scenario at present value already?

  26. Ted Kavadas says:

    I believe that the S&P500 price of 1370.58, the stock market high of 2011, is of considerable significance. Currently the S&P500 is at 1363.

    As to “where to from here”, my overriding concern is what I perceive as a rising level of risk and danger in the financial markets and economy, as seen in many areas, including technical, sentiment, and fundamental measures. For those interested, here is my blog post of today on the topic:

    http://economicgreenfield.blogspot.com/2012/02/building-financial-danger-february-21.html

  27. CANDollar says:

    Does anyone here believe that 1000 on the SP500 is possible?
    If so why?

  28. Tyler K says:

    “The March 2009 lows brought QE”

    This isn’t quite true. QE1 started on Nov 25/08 w/ $100B agency and $500B MBS.

    Mar 18/09, less then 2 weeks after the March lows, saw the _expansion_ of QE 1: $100B more agency ($200B total), $750B more MBS ($1.25T total) and added $300B Tsy’s to the mix.

  29. Tyler K makes a fair point

    Nov 25/08 — lets call that QE 0.5 — still in Beta

    March was the massive bazooka + FASB157 + huge oversold

  30. [...] Here comes Dow 13,000.  Then what? (Big Picture) [...]

  31. Onthemoney says:

    From a technical perspective there is a powerful case for a multi-week pause / correction starting now. Here’s one good reason why any short-term gains from here will almost certainly evaporate.

    http://jamesgoodeonthemoney.blogspot.com/p/stock-market-update-february-10th-2012.html

    Yet – aside from OEX options traders, who not long ago became extremely bearish (these guys are a highly reliable smart-money indicator) – I see limited indications of a developing major top.

    So I suspect we’ll consolidate for a few weeks, shed a few late-to-the party buyers and build a base for a final run up into summer. Only then will we find out whether this bull market is just another fake break.

  32. Joe Friday says:

    Not sure what the preoccupation with 13,000 is all about.

    I haven’t done the calculation recently, but in inflation-adjusted dollars, the DJIA would have to be something like 17,000 just to get back to where it was at the end of Clinton’s last term in 2000.

  33. Concerned Neighbour says:

    VennData, I suggest you re-read your post above and consider the message. You are essentially saying that anyone who doesn’t do what you say is stupid. Now while it may be possible you are a guru who has never made a bad trade in your life, you may wish to tone down the tremendous arrogance in future.

    Of course, you may be Ben Bernanke, and doing us all a favor by assuring us that stocks in go up in perpetuity. I suppose this is possible.

    And if you truly are a buy and hold stock investor, you are down big in real terms in the last decade plus. And talk to buy and hold investors in Japan to see how that worked out for them.

  34. Greg0658 says:

    “preoccupation with 13,000 …. would have to be something like 17,000 just to get back”
    its the MadisonAve WallSt blend to throw your/our efforts into the game for the fun of it
    mine/build/ship/buy&sell/use/toss .. wash rinse repeat

    not sure who/where I read the line yesterday (paraphrased) “the system just can’t stand to see people sit idle” that is just so wrong

  35. [...] generally agree with Barry Ritholz’s scenario for the market, though I believe that the Fed is likely to be proactive on [...]