17 April 2009

When Will This Bear-Market Rally End?

When will this bear-market rally end?

I recently discovered a hyper-prolific blog that's asking the same question from a variety of angles.

First, an excerpt from the Barclays note care of Zero Hedge:

It is fair to say that just about everyone is bewildered and trying to understand when this rally will end.
Normally, when we call for a trend to stop, we need to see three things. First, the trend has to have been strong and dramatic. Second, the trend has to have recently increased its trajectory in a hyperbolic way, to have accelerated its performance. And third, we need to have seen the trend reverse the clear majority of the prior trend.

On all three dimensions, we believe the current market conditions are clear and unambiguous. The current trend is strong and dramatic. We have clearly seen the trend accelerate, with the performance now coming from the tails of the distribution. And, we have reversed far more than the build-up of the prior trend. Think of a rubber band. What we are trying to identify is when the rubber band has been stretched far past its normal state. We believe unambiguously that we are at that point today.

All of this was true a week-and-a-half ago so we felt comfortable then calling for an end to the underperformance in Sentiment and the outperformance in Valuation. Today, we feel even more comfortable. And while on average, it takes 10 to 15 trading days after this condition has been met for the reversal to take hold, so we still have time, we certainly haven’t been proven right yet. As a prior boss repeatedly reminded me, and I humbly note here, there is no difference, though, between being early and being wrong.

Today, Zero Hedge pointed to the one month T-bill offering a fear-reflecting 0.01% yield:

Last levels seen during the fiasco after the November crash. Was at 0.08% two days ago. All money is running for near term safety, despite CNBC's urges for tresury investors to jump into equities - well, the opposite is happening...Maybe the real money is seeing something, and is accelerating purchasing of T-bills into this melt up.

Equities: have fun buying stuff.

How about we look at some charts that should make us feel better about questioning the post-nuclear-cockroach-like survival of this rally.

Here is the three-year chart of the $SPXA50 showing 88% of the S&P 500 is currently trading above its 50-day moving average. Breaching 80% is infrequent. 88% is downright rare, and at the very least, hasn't happened in the past three years:

Here is an annotated chart of the put/call ratio. The low 10-day moving average of the put/call ratio suggests the market is far too optimistic. Except the recent low reading from mid-March only slowed down the pace of the current rally--it didn't signify a market turnaround. Harumph.

And here's my current focus, the Russell 2000. I went short far too early, it seems, as the R2K is indeed jamming right up against both the overhead resistance levels established in January and February, and is near the top of its current bull trend channel.

This market looks so ripe that it's overdue for a bit of rot to form. Maybe I'll keep all of this negative evidence in mind tomorrow, and day-trade some under-$10 FAZ. I mean, what could happen? The market rises another 2% on more bad news?

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