Why I Think The Last 9 Days Are Just A Bounce

“The logic for this move still escapes me, but what’s logic got to do with it?  Nothing.”

– Larry McMillan (subscription required), Principal, McMillan Analysis Corp.

I am convinced that the big move up we’ve seen in the stock market averages over the last 9 trading days (S&P: +7.11%, Wilshire 5000: +7.15%) is just a bounce and not the beginning of a new move that will take us to new highs this year or next.

The reason is that the stocks that have led the move are the year’s worst performing and the one’s that are, and will continue to be, hardest hit by the fallout in housing and mortgage backed securities: homebuilders and financials.

BeSpoke Investment Group put together a handy little chart today showing that the stocks that performed the worst during the move down from October 9th through November 26th are the ones that have performed best in the latest rally. 

If you look at the accompanying table of best performers you can see that it is dominated by companies like Countrywide, Freddie Mac, Fannie, MGIC, PMI Group, Centex, Ryland Homes, DR Horton, etc…

If you look at this chart (XLF Compared To XHB, XLK and S&P) you can see that the financials and homebuilders have led the rally over the last 9 trading days while technology, the leader of the last leg up from August 16th to October 11th, have traded in line with the S&P. 

So the question I ask myself is: Can these leaders take us to new highs the way tech stocks did?  And the answer is: No, I don’t believe they can. 

That’s because their businesses will continue to be under pressure for the foreseeable future and so the upside is really quite limited.  They can go up, they can bounce, but can they move up, consolidate those moves, and continue to move up?  I just don’t think so.

Carter Worth made the same point on Fast Money on Friday and this short video clip of his analysis is worth a look.

That’s why I’m convinced this is the epitome of a bounce and that the trend is now down.  I wouldn’t be all that surprised to see the rally last through year end, but I would be surprised if it took us to new highs.