Monster Rally – S&P Up 10% In Five Weeks

April 18, 2008 at 9:35 am  ·  Category: Market Commentary, Sentiment Analysis, Technical Analysis

Wow.  Yowza.  Is the stock market cool or what?  I mean if you like ideas, if you like psychology, if you like money and people and games, how can you not love the stock market?

Let’s state the facts first: Over the last 5 weeks, from the low on the first day of trading after the announcement of the Bear Stearns acquisition/bailout of 1260 on Monday March 17th through today’s current level around 1390, the S&P 500 has rallied 10% (S&P 500 YTD Chart).

Not only that, but we are approaching, and in some cases surpassing, levels that have been significant upside resistance all year long:

  • The Dow has not been able to close above 12,800 since early January.  It’s currently trading around 12,860.
  • The Nasdaq has closed above 2400 only once since early January (Feb 1 at 2413 – after which it promptly sold off).  It’s currently trading around 2405.
  • Most importantly, 1400 has been a huge number on the S&P 500 since the credit crisis emerged in the middle of last year.  It essentially represented the bottoms for the August ’07 and November ’07 selloffs and the tops for any rallies we’ve seen this year.  The chart is just clear as could be: 1400 IS HUGE (S&P 500 1 Year Chart).

Almost 40% of stocks traded on the NYSE are now trading above their 200 day moving averages.  30% was important support during the August 07 and November 07 selloffs and it’s been resistance during this year’s rallies (% NYSE Above 200 DMA 1 Year Chart).

Not only are the technicals getting interesting, but there’s a whole story to go along with them.  By now most of us are familiar with it.  The cataclysmic collapse and subsequent bailout/acquisition of major investment bank Bear Stearns led to a spike in fear, panic selling, capitulation and a market bottom.  So far the people who have made that call look like geniuses.

Turning to sentiment measures, we can see risk taking and optimism returning:

  • The VIX, known as the Fear Index, has broken below 20 and it’s 200 day moving average, which has been major support for the last year.  Every time the VIX has gotten to it’s 200 day moving average since the credit crisis emerged, we’ve seen an end to rallies, a spike in fear and big selloffs (VIX 1 Year Chart).
  • The yen, another measure of risk because investors borrow in yen and buy other currencies to speculate, the so called “carry trade”, has also been sold off since March 17th ($ Yen YTD Chart).

What does it all mean?

A lot of people now believe the bottom is in

At first, there were a few bottom callers: Dick Bove, Barron’s, Cramer, Vince Farrell, Bob Doll.  The trickle then became a stream and that stream has now become an avalanche.  The crowd is starting to get behind this move.  More and more are piling in and putting money to work. 

Is it real?  Can it last?  Does the emerging market perception that a bottom has been put in place reflect the facts or the perpetual triumph of hope over experience?

Is it time to get long as stocks prepare to begin a new bull market and push up to new highs?

Or is this just another opportunity to sell stocks at a higher price and retrench for the tough times ahead?

Either way, it’s interesting, it’s a hell of a lot of fun, and these kinds of sentiment shifts and big moves present opportunities for those of us with a point of view and the conviction to act on it.

Posted by Greg Feirman  ·  Trackback URL  ·  Link
 

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