No Belief In This Rally

March 11, 2009 at 11:59 am  ·  Category: Market Commentary, Sentiment Analysis

Everyone knows today was a countertrend rally.  Just a bear market rally.  Everyone knows we’re going to revisit these lows.  Everyone knows we’re going lower….. From CNBC to news websites and blogs, the consensus is that today was just another bear market rally…. That’s the mood out there.  Nobody believes that this could be “it”.

– Muckdog, “Everybody Says Bear Market Rally”, The Learning Curve, Tuesday March 10 after the market close

The stock market’s rally earlier this week was certainly impressive.

Unfortunately, it is far less certain that it marked the beginning of a new bull market–especially in light of the market’s inability to sustain the blistering pace of that rally.

One of the biggest defects of rally earlier this week, ironically, was the sheer eagerness with which many declared that it meant that happy days are now here again.  Historically, bear market bottoms have rarely been recognized as such in real time.

This, after all, is the source of the old Wall Street saying that they don’t ring a bell announcing the bottom of a bear market.

On the contrary, past bottoms were more often than not distinguished by investor disgust, exhaustion and apathy.  Having been burned for so long by the bear markets that preceded those bottoms, investors resolved never, ever, to trust the market again.  By the time the market did finally bottom, therefore, there were relatively few investors who were even interested enough to take notice.

The immediate excitement that accompanied the market’s surge earlier this week, in contrast, is more reminiscent of what happens in a bear market rally.

A “whimper” might just be like the pattern seen at the 1974 stock market “lows” whereby the DJIA made a “selling dry up” low.  Recall the events of the 1974 bottoming sequence.  President Nixon resigned in August and the DJIA declined some 27% into its October “low” of 584.  From there a stutter-step rally ensued that would lift the senior index 15.5% (to 675) before peaking in November.  The Dow subsequently declined to a new 12-year low, which undercut the October “low” of 584, and in the process totally annihilated optimism by registering a new bear market low reading of 577 on substantially reduced volume (read: selling dry up!)  And that was it, the DJIA rallied into the new year and on January 27, 1975 a Dow Theory “buy signal” was rendered; the rest, as they say, is history.  Worth mentioning is that the rally off of the December 1974 “low” began as a “short covering” bear market rally, but turned into a bear market bottom that was never breached.
 
Jeff Saut, “Bear Market Rally?”, Monday March 9
I don’t know what Mark Hulbert is reading or watching but I don’t hear too many people coming out and declaring an end to the bear market this time.  We heard that in March 2008 and there were more bottom callers in October and November of last year but market sentiment seems much more subdued this time around.  People have been wrong, they’ve lost money and they don’t have confidence or belief in the market anymore. 
In his commentary from Monday morning, Jeff Saut said that this bear market is 90% over and the question now is whether it ends with a bang or a whimper.  If yesterday marked the low, that would qualify as a whimper.
I need to see a little more but I have a funny feeling about this market right now.  All of this negative sentiment and apathy and everybody so sure this is just another bear market rally and calling for a up move and then an inevitable retest makes me wonder if there’s nobody left to sell.
Phil Roth, Chief Technical Analyst at Miller Tabak, told The Wall Street Journal earlier today: “Today’s action is actually pretty encouraging, since the market isn’t just giving everything back [from Tuesday’s run-up].  Now what we need to see as confirmation is another good day soon without any intervening bad days.”  That’s a William O’Neil Follow Through Day
I have a good feeling about this market.  I’m not dumb enough to call a bottom but I have a feeling Monday might have been “it”.  Even if it wasn’t, there’s enough value in this market right now that I want to be more long than short.
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