If It Looks Like A Bull, Walks Like A Bull, And Acts Like A Bull …

Since humans have been greedy and fearful since the beginning of time, they tend to act in similar ways before, during, and after a financial crisis. These tendencies manifested themselves during the tulip bulb craze of the 1600s, the dot-com craze of the 1990s, and the real estate mania of the 2000s.

The table shown below allows you to visualize the transition that has taken place between March and June of 2009. In March (far left side of the table), most markets had the characteristics of a bear market. Currently (right side of table), numerous markets look much more like an early bull market than an on-going bear market. Below, we will use the S&P 500 (2000-2004) to illustrate and expand on the concepts as they relate to the current day and the information presented in the table below.

Printed Money And ‘Less Bad’ Economic News

In 2009, the basic rationale for driving stock prices higher leans heavily on the “less bad” perception of future economic activity. The markets, as evidenced by credit spreads, commodity prices, and stock prices, have been able to move away from “the end of the world as we know it” mode. An unprecedented amount of economic stimulus and newly printed money has helped shift the primary fear from one of deflation to a possible loss of purchasing power caused by inflation. The market’s perception seems to be “if things get worse economically, and they may, the policymakers’ response will be more stimulus and more printed money”. This perception coupled with the “less bad” outlook has increased the demand for inflation-friendly and weak-dollar assets (oil, gasoline, copper, emerging market stocks, foreign bonds, commodity-related currencies, etc.).

By studying past bull and bear market cycles, we can better understand what to look for during a possible transition form a bear market, dominated by fear, to a bull market which eventually becomes dominated by greed. If we are not aware of the twin thieves, greed and fear, they will rob us and hamper our ability to grow our accounts. As we have stated in the past, in a bull market:

• Price tends to stay above the 200-day moving average(MA) (red line).
• The 50-day moving average (blue line) tends to stay above the 200-day moving average.

In bear markets, professionals tend to buy at extreme points of pessimism looking for a profitable trade. Traders often ride a market back to its 50-day or 200-day moving average and then take profits. In a bear market, traders tend to sell at the 50-day or 200-day because their fear of losses remains greater than their confidence the market can move higher. Their lack of confidence speaks to their pessimistic view of future economic activity. Bear market rallies are mainly fueled by traders and lack participation from longer-term investors.

In a bear market (see above), where conviction is lacking to push prices higher:

• Price (black line) tends to stay below the 200-day moving average.
• The 50-day moving average tends to stay below the 200-day moving average.

At some point in a bear market, the perception of traders and investors slowly starts to shift toward the acceptance of better times ahead (or “less bad” times). When their confidence, and more importantly their conviction, becomes strong enough, instead of selling at the 50-day or 200-day moving average during a rally, they hold thinking the markets may be able to move higher. If enough investors and traders share the same improved outlook, a market is finally able to clear previously insurmountable hurdles in the form of the 50-day or 200-day moving average.

Emerging Markets Have Lead The Way Higher

Since the S&P 500 is a laggard in the current market, we will use the Emerging Markets Index to illustrate how numerous leading markets, asset classes, and sectors look in June of 2009. If you compare the chart of the Emerging Markets Index below to the This is What A Transition From A Bear To Bull Looks Like chart above, and do it with an open mind, you will be hard-pressed to come away with a bearish interpretation.

Leading Markets Are Holding Above Their 200-Day MAs

When buyers have enough conviction to push a market above its 200-day moving average during a bear market, they are often immediately greeted by heavy selling. The crossing of a 200-day moving average means little if the market cannot successfully retest and hold it. The longer a market stays above the 200-day MA the more meaningful and bullish it becomes.

Part Of The Pattern: Not Accepting The Possibility Of A New Bull

The fact few are willing to call the current rally anything more than a bear market rally fits well with the historical profile of new bull markets. No one, can definitively say a new bull market has or has not started – only time and future market action will tell. However, we can confidently state that what has transpired since the March 2009 lows compares very favorably with the end of a bear market and the beginning of a new bull market. How long a new bull might last is also something that can only be definitively answered in retrospect. While market conditions have improved, risk management must remain a significant part of any investor’s game plan. Even bull markets can experience significant corrections.

Check Your Forecast At The Door

Our job is not to agree or disagree with the market’s collective bullish stance. The market does not care what we think and is going to do what it is going to do regardless of any bullish or bearish analysis we can produce. The same can be said for any individual, investment firm, or talking head on TV – the market does not care what they “think”. Our job is to discern as best we can the prevailing risk-reward profile of any given market. The evidence at hand strongly supports a shift from unfavorable conditions for investing to favorable conditions for investing. The purpose is not to forecast, but to understand what is in front of us at the present time while understanding the current bullish evidence may not be in place in a few weeks or months. It is important that we keep an open mind about both bullish and bearish outcomes in order to process future signals from the market with an unbiased mind. This is one reason why we look to minimize bullish and bearish debates with clients – we are human beings and we can become biased just like the next guy. If the markets continue to go up, we want to participate. If the current bullish signals are discounted with obviously bearish action, we will shift our strategy accordingly.

Forecasting Can Lead To Defending

As we have stated for years, forecasting can lead to biased interpretations of future market activity. If we tell you this is a bear market rally, we will look for reasons to remain bearish from both a fundamental and technical perspective. Rather than producing and possibly needing to defend a forecast, we simply need to pay attention to what has and is actually happening. If you approach the current market with an open mind, and with a sense of history, it is nearly impossible to ignore the almost countless reasons to accept the possibility a new bull market has started – one that could last longer and go further than most can even imagine. Knowing what we know, it is prudent to continue to deploy capital as long as conditions remain favorable. It is also necessary to respect the numerous fundamental problems that remain and to understand the market’s bullish stance may be relatively short-lived.

Fundamentals Are Built Into The Charts

Charts are a way of monitoring the current risk tolerance and collective economic outlook for all market participants. Every bit of fundamental analysis and its impact on investor behavior is built into the charts. Fundamental analysis from the largest brokerage houses and the most successful hedge funds is reflected in the charts. The charts are clearly stating that the collective fundamental outlook has improved greatly in the last 90 days. If the collective economic outlook was not greatly improved relative to prior expectations, numerous asset classes would not have received the conviction from buyers necessary to overtake their 50 and 200-day moving averages. What has happened since the March 2009 lows is most likely not a purely technical event. A purely technical event or a bear market rally from oversold conditions most likely would have failed long ago. If we are willing to listen, the markets are trying to tell us the next 12 to 18 months may not be as bad economically as many believe. The longer the markets can hold above their 200-day moving averages, the more significant the technical and fundamental signals become.

Source: Chris Ciovacco

Richard Russell (Dow Theory Letters): Are equities offering value?

“There’s no question that the huge break in the market from late-2007 to March 2009 was primary bear market action. During the decline from Dow 14,164 to Dow 6,547, the Dow lost over half of its value in a period of just 17 months. In my book, that qualifies the decline from the 2007 high as a severe or major bear market (actually, it was the second worst bear market on record). Going back over history, major bear markets tend to end with stocks selling at great values. Or as previous Dow Theorists put it, ‘stocks at bear market lows sell below known values’.”So question – Have we seen stocks selling at great values or below known values in this bear market?

“Let’s take a look at previous bear market bottoms.

“In July 1932, the Dow sold at a yield of 10.2%.

“In June 1949, the S&P sold at a yield of 7.6%

“In December 1974, the S&P sold at a yield of 5.1%.

“In April 1980, the S&P sold at a yield of 5.7%.

“In September 1982, the S&P sold at a yield of 6.3%.

“And what was the yield on the S&P in March 2009 (the ‘supposed’ bear market bottom)? The yield on the S&P in March 2009 was 3.58%, hardly indicative of the bottom of a great bear market. Actually 3.58% is more what I’d expect at a market top. The current S&P dividend is now 2.45%.”

Source: Richard Russell

CNBC Report by Bill McLaren – 8 May 09

May 09 2009 CNBC Squawkbox Europe

LET’S LOOK AT THE S&P 500 INDEX-DAILY CHART
 

Rallies in legs of bull trends have very specific characteristic.  Rallies in bear trends have very specific characteristics.  This rally has developed some bull market characteristics.  You can see when this rally started it move vertically and that is normal for bull and bear trends.  Then the index moved into a struggling move up and can be seen as each new high was immediately reversed, again “normal” no matter the direction of the trend. The index then fell two days and came back up to test the high in 6 days.  If this were a rally in a bear trend the index would have reversed to down at that marginal new high.  Instead the index showed a vertical move up and is a characteristic of a bull trend. 

The trend is currently an exhaustion mode of trending and will exhaust into a high.  If this keeps the characteristic of a bull trend it will correct three days and stay above the previous breakout point or the large horizontal line on the chart and rally to a new high and consolidate 7 to 12 trading days. 

The 60 day cycle expired two days ago and is resistance in “time.”  The previous largest rally was 63 days ending May 19, 2008, so this time period is important. The large outside day down yesterday looks like an exhaustion but remember if this is a leg in a bull trend the correction after the exhaustion will only be three days it will hold the horizontal line followed by another thrust up to a new exhaustion high and then consolidate 7 to 12 days.  If the move down exceeds three days and moves much below the horizontal line then the uptrend is in doubt and further correction will occur. 

LET’S LOOK AT A WEEKLY CHART
 

This is a picture of the bear campaign with the range divided into 1/8^th and 1/3^rd.  As a bear market matures the rallies become smaller and smaller until a final exhaustion of the trend.  Has this occurred?  The previous rally stopped at ¼ retracement which keeps the down trend intact and this rally has just moved above that resistance level.  The previous largest rally was 183 points and this is at 262 points.  Historically if a rally can reach 3/8 of the range down at 1007 it indicates an end to the bear trend.  The market will correct significantly from that resistance but if the index can reach that level it is a strong indication the bear trend is complete and the next selloff will be a higher low.

So the index may have exhausted into the time window of the 60 day cycle.  If the exhaustion is significant then the selloff will exceed 3 trading days and break the support at 875.  If the index is running higher then that will hold and become a springboard for further advance possible out to the first week in June. 

Source: McLaren Report

Forex Market Update

MAJOR HEADLINES – PREVIOUS SESSION

• Australia Apr. NAB Business Confidence fell to -14 from -13 in Mar.
• China Apr. PPI fell -6.6% YoY vs. -6.3% expected.
• China Apr. CPI fell -1.5% YoY vs. -1.4% expected and -1.2% in Mar.
• Norway Apr. CPI out at +0.2% MoM as expected and underlying CPI out at 0.3% as expected
• Canada New Housing Price Index out at % MoM vs. -0.5% expected

THEMES TO WATCH THIS WEEK

•  
  • UK Apr. RICS House Price Balance (2301)
  • US Fed’s Bernanke to Speak about Stress Tests (2330)

Market Comment:

Last week ended in a blow-off rally in risk appetite, with equities making a comeback back toward recent highs, US treasury yields bolting to new highs in yield, and the commodity currencies snapping to strong new highs to end the week and EURUSD bursting above its 200-day moving average. All of these developments came after a marginally less bad than expected US payrolls number, which was hardly a game changing factor in the fundamental outlook. Our best guess is that much of this rally has been driven by what nearly all bear market rallies are driven by: exhaustion of supply that has driven risky asset selling pressure as the market had become too heavily positioned for more risk aversion. In this situation it is easy for a change of sentiment by some (even a small minority of those sitting on all of their piles of cash) and an opportunistic understanding of the skewed positioning by sharp operators with deep pockets, and then you have the stuff for a rally: a bear squeeze aggravated in the later phases by those who are desperately afraid that “this is the one” and feel compelled to pile in – just in case – or are forced to in case their benchmarks outperform their own performance.

The rally in risk has reached enormous proportions and some time ago we felt that it was already getting long in the tooth – at this point, as the UK Telegraph’s Ambrose Evans-Pritchard puts it in today’s great opinion piece, “even the hard-bitten bears are starting to throw in the towel…”. And it is tempting to throw in the towel after the Friday flourish to the recent rally in risk. But we need to keep our conviction that a return in risk aversion is still the greatest risk in the medium term even as the short term has thrown us a curve. There is nothing in the structure of the Western economies that will allow a recovery beyond a weak uptick that has been fed by money printing and a mild inventory refresh cycle. And China needs more time for its transformation to a more balanced economy, a transformation that will most likely require sweeping changes in the social safety net and property laws. With the last major batch of event risks behind us and earnings season now out of the way, it may soon be time for the market to begin to reassess its convictions, a process that could start already this week. There may be enough momentum in the market to carry us another percent higher in EURUSD, for example, or another surge in AUDUSD, but signs are likely to emerge of faltering conviction soon. As the saying goes, of course, the challenge to all of us with these convictions, of course, is that the “markets can stay irrational longer than you can stay liquid.” (from Keynes). Still, there are signs of weakness in conviction already in Monday’s European session, as the JPY is fighting back and US treasuries look strongly bid.

Tuesday

• Japan Apr. Machine Tool Orders – this is the number that really proves the point that during a downturn, capital spending on production-related expenses experiences the worst hit. This number showed a -85.2% drop in March.
• Sweden Apr. CPI – headline inflation dipped into negative territory in March for year-on-year comparisons, but the core numbers are still showing a 1.5% increase. The trend is very steeply negative, however, considering that it was 3.0% as recently as October of last year.
• UK Mar. Visible Trade Balance – the UK terms of trade are only showing tentative signs of improvement despite the vastly weaker sterling. This trend needs to improve sharply as does the situation in capital flows for the pound to turn up sustainably.
• UK Mar. Industrial/Manufacturing Production – UK industrial activity is off some 13% from last year, and so far faring much better than Germany, where production is off over 20%. The weak pound has offered at least some support, it seems.
• UK Mar. DCLG House Prices – there was a great deal of hubbub over recent numbers that showed an uptick in UK house prices. This was likely simply due to the UK housing market transitioning from “clinically dead” to going back on life support from virtual nationalization of mortgage related activity. It is premature to look for a meaningful recovery in UK house prices.
• Canada Mar. International Merchandise Trade – dipped into negative territory at the turn of the year for the first time since the mid 1970′s and could turn negative again if the worl recession resumes apace.
• US Mar. Trade Balance – this is the monthly reminder that the new world order is arriving as the old global imbalances continue to unwind. The Feb. While the coming months may show an uptick in the trade deficit if US business decide to rebuild inventories and due to stable to higher oil prices, if the US recession redeepens, we could see a month in the next 12 months with a US trade surplus, certainly on an ex Petroleum basis, where the trade deficit was a mere -12.3 billion USD, down from more than -40 billion in 2006.
• UK Apr. NIESR GDP Estimate

Wednesday

• Japan Mar. Current Account Total – the incredibly shrinking current account surplus of Japan is another of the global imbalances that is unwinding in this downcycle as Japan’s export markets are in ruins. Could we see a small uptick for a few months on an inventory building cycle, however?
• China Apr. Retail Sales – the Chinese consumer is supposed to save the world, but will they? The year-on-year rates are dropping fast, though still at a +14.5%, but even that level has been helped out by a massive loosening of credit markets by the Chinese authorities and partial payment of, for example, appliance for rural people with modest incomes.
• China Apr. Industrial Production  – expected above 8% for YoY comparisons and well above the  5.4% nadir from last November. But electricity production is still down year-on-year. Is this number for real?
• UK Apr. Jobless Claims Change  – claims are rising at a worrying pace, but the rate is not likely to ever surge again above Feb’s 136.6k number – an all time high.
• EuroZone Mar. Industrial Production
• UK Bank of England Quarterly Inflation Report – this is not likely to prove upbeat reading, as the Bank obviously holds a dour view on the economy after the last BoE meeting saw another 50 billion sterling of QE announced. But sterling is already very weak, so can it add fuel to the fire?
• US Apr. Advance Retail Sales – the month on month figures have stabilized at an astounding -7% for year-on-year comparisons as the mighty US consumer has neither the interest nor the means to expand credit in this economy. Any recovery in spending will be brief and passing for the next year at least.

Thursday

• New Zealand Apr. Business PMI – the NZD has seen a tremendous bounce, the fate of which will be determined by global risk appetite and food commodity prices more than sentiment surveys for now.
• New Zealand Apr. Non-resident Bond Holdings  – the foreign percentage of NZ holdings has remained remarkably steady – and will need to remain this way if NZD is to avoid the abyss…
  EuroZone ECB to publish Monthly Report
• US Apr. PPI – Houston, we have a conundrum. Normally, PPI leads CPI, but the core PPI has fallen less and fallen later than the core CPI – what gives? We would expect a softer than expected number.
• US Weekly Initial Jobless Claims – last week’s number was the lowest since January – a sub-600k reading will get tongues wagging about falling second derivatives, though the build in momentum in claims virtually guarantees 10%+ unemployment in the US

Friday

• New Zealand Mar. Retail Sales
• Japan Mar. Machine Orders
• Japan Apr. Domestic CGPI
• Germany Q1 GDP – expected to show worse the -6% annualized growth, thus matching the poor US number. This number could even surprise to the downside.
• Switzerland Mar. Retail Sales
• Norway Apr. Trade Balance
• EuroZone Apr. CPI – the ECB seems confident that deflation risks are minimal – the coming several months will tell us whether that view is justified, especially once we get on the other side of the year-on-year comparisons that are distorted by the oil spike of last summer.
• EuroZone Q1 GDP
• Canada Mar. Manufacturing Shipments – it’s tough to get bullish on this number with the US car industry in tatters and rapidly downsizing.
• US Apr. CPI – note the PPI note for Thursday above – the coming months are vital for the inflation/deflation debate. Thus far, the core CPI is still at 1.8% YoY vs. the 1.1% trough in the 2001 mini-recession, but what are the effects of the slowing wage growth and the threat of outright wage deflation that is already evident for many? More than half of the Mar. CPI increase was due to an 11.0% increase in alcohol and tobacco products – could we see a downside surprise with this month’s number? Bloomberg consensus is for a 0.1% reading. The core has only showed a 0.0% reading five times in modern memory and no negative readings have been seen since the volatility early 1980′s, when year-on-year inflation was still in the high single digits
• US May Empire Manufacturing – the first of the regional manufacturing surveys.
• US Mar. TIC Flows – ancient history, as usual
• US Apr. Industrial Production and Capacity Utilization – the capacity utilization number is simply amazing and a better indication of the status quo of manufacturing lately than the surveys. The early 1980′s lows were long ago surpassed and are still expected in at sub 70%.
• US May preliminary University of Michigan Confidence – sentiment has likely improved somewhat, but is it sustainable or just a byproduct of the uptick in hope and equities and the downtick in bank bailout news?

Earnings Beat Rate Sticking at 62% – S&P 500

Another 682 US companies reported earnings this week, bringing the overall total reported this earnings season up to 1,903.  Next Thursday marks the end of the first quarter reporting period when Wal-Mart releases their numbers.  As shown below, 62% of the companies that have reported have beaten analyst earnings per share expectations.  With only a handful of companies left to report, the “beat rate” is sure to hold above 60%.  The fact that the “beat rate” has been able to increase as more and more companies have reported has helped the market trade higher throughout earnings season.  Last quarter’s “beat rate” was a bear market low of just 55.5%.  As shown in the bottom chart below, this earnings season will be the first quarter over quarter increase since the third quarter of 2006.  When the “beat rate” started to decline in 2007, it was definitely a warning signal for the market, and this quarter’s increase is hopefully the start of a new positive trend.

Source: Bespoken Research

Gold bullion: regaining its shine?

Is gold bullion coming back to life? Should one read anything into its rise of 3.6% over the past two days to above $900?The yellow metal solidly outperformed stock markets for the bulk of the equity bear market that commenced in October 2007. However, as investors waved safe havens goodbye and embraced risky assets since early March, gold lost its luster.

Could gold’s treading water simply be ascribed to “Armageddon hedging” having dissipated, or is it perhaps the threat of the IMF’s plan to sell 403 metric tons of gold once approved by US Congress (unlikely before late in 2009)?

The Financial Times this morning published an article on how dearly gold sales over the years have cost European Central banks after copying the Bank of England’s program of large-scale gold sales that commenced in 1999, thereby triggering a phase of “anti-gold” sentiment among European central banks.

The FT’s chart of central banks’ gold holdings provides an excellent snapshot of the various governments’ policies regarding bullion. However, history tells us that when Western central banks sell gold the resultant price decline usually offers a solid buying opportunity. It is also safe to assume that China, which has secretly almost doubled its gold holdings between 2003 and 2008, would be eyeing the West’s gold, especially as Beijing has a stated policy of diversifying out of the US dollar and only has 1.6% of its reserves invested in gold (compared with the global average of 10.5%).

 world-gold-holdings

While gold has moved out of the headlines and investors have become frustrated with its performance, printing presses are running at full speed to produce ever-increasing quantities of fiat money as governments’ engineer the greatest asset price reflation in human history, and succeeding at it.

The longer-term fundamental case for the yellow metal is arguably positive, but the shorter-term technical picture is also starting to look interesting. This is explained in some detail by Adam Hewison of INO.com who prepared a short technical analysis of gold’s most likely direction and key chart levels. Click here or on the image below to access the video presentation.

Gold’s subdued performance of late may very well be the proverbial lull before the storm as the equity rally starts looking tired and pundits come to the conclusion that the convalescence of the global financial system has not yet run its entire course.

Source: Prieur du Plessis

Overbought Stock Levels and Lengths

Investors are worried that the market is set to pull back now that we have reached overbought levels (1 standard deviation above the 50-DMA).  However, markets can stay overbought for long periods of time just as they stayed oversold for months at a time during the most recent bear.  The S&P 500 has now been overbought for ten days in a row.  Since the bear market started in October 2007, the only other streak of consecutive overbought days ended at 15 last May. 

When we look at streaks of overbought days going back to 1928, however, the current 10-day period is nothing but a blip on the screen.  As shown below, there have been thousands of similar or more extreme streaks of overbought days, so just because we’re overbought now doesn’t mean we can’t stay overbought.

Source: Bespoken Research

David Fuller (Fullermoney): Will stock markets stay above March lows

“The important question is whether or not Wall Street continues to range above its March lows? The answer will have significant implications for other stock markets.

“At Fullermoney, we maintain that the S&P 500 Index will most likely hold above its March low, as it continues to develop a base formation. The main reason, previously stated, is that we are witnessing the greatest attempt at asset reflation in human history. In comparison, it makes Greenspan look, well … almost Austrian and the USA is certainly not the only country engaged in a record reflation. The secondary reason is the record levels of cash held by institutional investors.

“Let us now consider three scripts for Wall Street and its implications for other stock markets: 1) the S&P keeps on rallying, surprising even the bulls; 2) the S&P ranges in extended base formation development for many more months; 3) the S&P rolls over and resumes its bear market by moving well beneath the March low.

1) In this event, the stock markets and sectors that are already considerably outperforming the S&P – mainly Fullermoney themes, including China-led emerging Asia, South American-led resources markets and technology – will continue to do much better than the S&P. Other OECD stock markets, (tech & telecom weighted Sweden excepted), will track the S&P, albeit usually with a slightly higher beta.

2) The Fullermoney themes in (1) above outperform, extending their ranging upward trends. Most OECD stock markets track Wall Street.

3) Fullermoney themes fall back and extend their base formations. Most OECD stock markets track Wall Street, with Sweden being the most likely exception.

“What do I expect? I think it will be (2) above, although possibly in combination with (1). I will not worry too much about (3), provided the S&P can maintain approximately half of its gains from the March low during the next reaction phase.”

Source: David Fuller,Fullermoney

Will Institutional Investors Kill the Rally?

by Marty Chenard

As you know, we track how much Institutional Buying and Institutional Selling occurs everyday. We also track what is happening to the net value of the “core holdings” held by Institutional investors.

The Institutional core holdings represent the majority of the money invested by Institutional investors, and since Institutional investors account for over 50% of the market’s daily volume, this becomes an important group to track.

What the Institutional Index is showing now …

First note the triangular pattern that started last September and broke to the downside in February. That produced a sharp down movement in market that bottomed out in early March.

From there, the Index of Institutional “core holdings” have been exhibiting an upside rally. (The horizontal orange line marks the July 2002 Bear Market low.)

But … notice what is happening now: The Institutional Index has made NO progress since April 2nd. Yesterday, it closed very close to April 2nd.’s close.

Now … look at the circle I drew. The inside of the circle contains all the highs since March and acts as a resistance line.

Is it possible that the action of the last 18 days is just a consolidation?

The peak amount of Institutional Buying occurred during the 4th. week of March. That is when the Index first peeked over the triangle’s resistance line, AND the 2002 (orange) resistance line.

Since then, the amount of Institutional Buying has steadily decreased. On the other side of the equation, after considering the amount of daily selling, they are still in net Accumulation.

Staying in Accumulation will keep the Index positive and above the 2002 resistance, but the net Accumulation is continuing to decrease. It is not a problem yet, but if the current “trend of decreasing Institutional buying” does not cease, the Institutional Index and the other market indexes will see their rallies die off.

Is this a true bear market bottom? – Richard Russell (Dow Theory Letters)

“… the market is now about one month off its March 9 low. Yet already the mood has changed, public sentiment is turning almost rosy, and analysts are openly urging people to buy stocks.

“The bear is doing its job. In less than a month, the Dow has recouped 20% of its 7,617 bear market losses. If the Dow was to retrace the normal one-third to one-half of its loss since late-2007, the following is where the Dow would be. A one-third recovery would take the Dow to 9,086. A one-half recovery would take the Dow to 10,355. Last Thursday the Dow ended the week at 8,083, which was 1,003 points short of a one-third recovery.

“It seems to me that this is awfully fast for the business news to turn rosy – only one month away from the March 9 ‘supposed’ bear market bottom. Bear market bottoms don’t tend to work that way. After a true bear market bottom, it often requires many months before the crowd and the media turn bullish.

“To repeat, I’m suspicious.”

Source: Richard Russell, The Dow Theory Letters, April 13, 2009.

S&P 500 Moving Average Analysis

The S&P 500 is currently trading above its 50-day moving average and below its 200-day moving average. The recent rally has also been one of the most impactful during the current bear market in regards to where the index is trading relative to both its 50- and 200-days.  As shown in the second chart below, the S&P 500 is now 7.85% above its 50-day moving average, which is the most overbought reading for the spread since the bear market began.  The index has also now traded above its 50-day for 11 days in a row, which is the longest streak since the 33-day period that ended last May.  And finally, the S&P 500′s 200-day moving average spread is the highest it has been since the market really tanked last September.  If the index can eventually trade above both its 50-day and 200-day, it will be a big positive for technicians looking for signs that the bear is officially over.

Source: Bespoken Research

Russia leading the BRIC Rally

The last time I checked in with the BRIC countries, four months ago, the issue de jour was BRIC Update: China a Leader or an Outlier? At that time, China was starting to move impressively off of an October bottom and Russia was a notable laggard.As the chart below shows, in the five weeks since the U.S. stock indices have bottomed, it is Russia (RSX, red line) that has been the strongest performer, followed by India (EPI, blue line), with Brazil (EWZ, gold line) and China (FXI, black line) bringing up the rear.

I watch these relationships closely for a number of reasons, not the least of which is to determine how well the group as a whole is performing, if any particular country is separating itself from the pack, whether commodity producers or consumers are in favor, etc.

Part of the reason Russia has bounced more than its BRIC counterparts is that Russia suffered disproportionately in the recent bear market. In the nine months from June 2008 to February 2009, the RSX Russian ETF lost more than 82% of its value. The last month, however, has seen some notable improvements. Russia’s credit default swaps, for instance, which reflect to the cost to insure the country’s debt, have improved from 694 to 412 in the last four weeks as the outlook for that country’s sovereign debt has improved dramatically.

Going forward, country-specific trends may continue to dominate, but I suspect the relative performance of Russia and Brazil will say more about improvements in the commodities market as a whole than about the plight of a particular national economy.

Posted by Bill Luby

What are the markets trying to do? – Richard Russell (Dow Theory Letters)

“The market situation has seldom been more confusing. Many analysts are convinced that we are in a new bull market. Others (me included) believe we are in a bear market correction (rally).

“Because of the confusion, I’m going to step out and make a few guesses (might as well, since nobody really knows what’s going on).

“(1) I believe that we’re in a secondary (upward) correction of a bear market. I’m going to guess that this correction could rise further or at least last longer than most people are expecting. A bear market rally is supposed to convince the majority that a new bull market has started. The rally will often continue until a large number of investors are back on board, and then the bear will kill them as it fades away, leaving the new optimists high and dry and with losses.

“(2) Gold is in a downward correction of its primary bull market. Gold may decline or stall until it convinces the majority of gold-fans that the gold bull market has died. Holders of ‘paper gold’ and gold futures and options will be frightened out of their holdings. What we’re experiencing now is the big correction that often occurs prior to the third speculative phase in gold. Holders of physical gold (coins, bars) will do best, since they will tend to hold on to their gold positions no matter what.

“So what are the markets trying to do? They’re doing what they always do, keep investors in the equity bear market and keep investors out of the gold bull market. Why would they do that? Because that’s the very nature of markets. Markets tend to thwart the majority. And that’s logical and self-evident. If markets existed to make money for the majority, then most market participants would be millionaires, and we know that sadly, that is not the case.”

Source: Richard Russell, The Dow Theory Letters, April 7, 2009.

Rally too flashy for our liking – David Rosenberg

“David Rosenberg, the soon-to-be former economist for Merrill Lynch, had a very prescient commentary last week about the 25% four-week rally.

“As for this 25% rally in three weeks – the consensus has swung to the view that this is a real inflection point. One warning. We saw this happen in late 2001 and early 2002 too … big, big rally; early cyclicals flew; the markets thought we were in for a V-shaped recovery … it was longer away than many at the time believed and many were burnt as a result. And keep in mind that the ‘second derivative’ on growth began to improve in the fourth quarter of 2001, and the S&P 500 still did not bottom for another year.

“Currently, the equity market is priced for $70 on earnings on a going-forward basis, or a 75% rebound. And with retailing stocks up 30%, leisure/accommodation up 35%, and the homebuilders up 40%, the market is priced, amazingly, for a revival that is led by the consumer! (in fact, the only S&P sector that is now trading at P/E multiples that are at post-2001 highs is the consumer cyclical group). If we see that in the next year, we will be the first to hang up our Hewlett Packards. Being up 25% in a year and staying bearish … well, shame.

“Achieving that in less than a month – come on. Too flashy for our liking.

“In fact, let’s learn from history. The only times we have ever seen the stock market surge close to this much in such a short time frame were: December 1929, June 1931, August 1932, May 1933, July 1938 and September 1982.

“Only in September 1982 and in May 1933 was the equity market embarking on a new bull phase. But guess what? By the time the S&P 500 surged 25%, it had already crossed above its 200-day moving average. So call us when the S&P 500 crosses the 1,000 mark – another 20% to go. That is how deeply entrenched this particular bear market has been – that even after this massive rally, the onus is still on the bulls! Consider as well that on four of the six occasions that the equity market staged such a huge rally over such a short time period, it relapsed. So we are going to wait this out, acknowledging that we could be late to the party. We still feel the downside risks are too high to be involved.”

Source: Barry Ritholtz, The Big Picture, April 6, 2009.

Sustainable Bull Market Not Likely

by Chris Ciovacco

Rather than relying on hope as the primary driver for making decisions, investors would be well served to focus on the fundamental and technical facts. An analysis of the facts leads us to conclude we are facing the following in terms of probable outcomes:

• Highest Probability – New lows / continuation of bear market.
• Moderate Probability – Cyclical bull – higher highs – followed by retests or new lows.
• Lowest Probability – A sustainable bull market (secular).

Fundamentals Remain Weak: From November 1929 to July 1932, there were five rallies in stocks between 20% and 23%, and all were followed by lower lows. In the 2007-2009 bear market, banks have been the area of primary concern. Banks remain a concern. While many market participants dismiss unemployment figures as lagging indicators, they fail to recognize that every time unemployment ticks up, default rates on all types of loans are going to tick up as well. The government has spent quite a bit of time and energy focusing on toxic assets in order to protect bank bondholders. The government’s programs will have a muted effect as long as housing prices continue to fall and unemployment continues to rise. The inventory of homes for sale remains very high. Home prices have further to fall until supply and demand come back into balance. As prices fall, the balance sheets of banks will continue to deteriorate. It is widely accepted that unemployment will rise further, which means default rates on loans will also continue to climb.

Recession Related Problems Still To Come: The government’s vast market intervention will do little to stem the tide of rising credit card and commercial real estate defaults. Banks have received significant government assistance with toxic assets, but they have major problems with more typical recession related issues, such as credit cards and commercial real estate defaults. Below are some excerpts from recent Bloomberg stories S&P 500 Can’t See Enough Money to Feed Stocks’ Rally and Mayo Gives Banks ‘Underweight’ Rating on Loan Losses.

• Wall Street analysts overestimated bank profits for at least six consecutive quarters.
• Commercial property loans in default or foreclosure jumped 43 percent in the first quarter as the contraction reduced occupancies and the credit crisis stymied refinancing. The decline may force banks to increase loan-loss provisions and write down the value of commercial property loans, which Citigroup, Bank of America and JPMorgan are all carrying at 100 percent of face value, according to estimates in a March 24 report by Richard Ramsden, an analyst at New York- based Goldman Sachs Group Inc.
• CLSA analyst Mike Mayo assigned an “underweight” rating to U.S. banks, saying loan losses may exceed Great Depression levels and the government may be forced to take over large lenders.
• “While certain mortgage problems are farther along, other areas are likely to accelerate, reflecting a rolling recession by asset class,” said Mayo, who joined CLSA from Deutsche Bank AG last month. “New government actions might not help as much as expected, especially given that loans have been marked down to only 98 cents on the dollar, on average.”
• Mayo said he expects loan losses to increase to 3.5 percent, and as high as 5.5 percent in a stress scenario, by the end of 2010. The highest level of loan losses in the Great Depression was 3.4 percent in 1934, according to the report [by Mayo].
• The nation’s largest banks may be transitioning from a financial crisis marked by writedowns of capital to an economic crisis featuring large loan losses, Mayo wrote. The U.S. government cannot provide much relief because its actions will lead to either banks having to raise new capital or toxic assets remaining on banks’ balance sheets, Mayo wrote.
• Mayo said solutions to the banking crisis will take time, as the increase in risk happened over a decade or more.
• Meredith Whitney, who left Oppenheimer & Co. in February to found Meredith Whitney Advisory Group LLC, said in a Forbes interview that banks will continue to write down their mortgage assets as home prices decline further than lenders expected. Home prices are not done falling and will ultimately drop 50 percent from their peak, Whitney said today in a CNBC interview.
• The unemployment rate also has exceeded banks’ projections and could lead to further loan losses, Whitney told Forbes. Banks “by and large” will show profits in the first quarter before provisions for loan losses, Whitney said on CNBC. (Source: Bloomberg.com).

Earnings Are Still A Problem: The S&P 500 is currently trading at 14x forward earnings. Forward earnings are another way of saying estimated earnings. If you have worked on Wall Street for more than a week, you know estimates of future company earnings are extremely inaccurate, especially estimates made 12 months in advance. Earnings estimates are about as accurate as a local weather forecast made a year in advance. Since January 1, 2009, earnings estimates for the S&P 500 have dropped from $75 to $59 (a 34% decline in three months). The odds are extremely high that earnings estimates for the next 12 months will continue to be reduced significantly in the coming months, which means the S&P 500 is trading with a PE higher than 14. Bear markets can end with PEs in single digits.

Recent Rally Impressive: The probability of a cyclical bull market taking shape has increased in recent weeks as investors have shown an increased appetite for risk in some markets. A cyclical bull market, in contrast to a secular bull market, is much shorter in duration and eventually gives way to the primary bearish trend. A cyclical bull market could see the S&P 500 advance as high as 940, which is 15% higher than current levels. Under the cyclical bull market scenario, stocks would take one of three paths after making higher highs (above 840):

• A correction back toward 840.
• A successful retest of the November 2008 or March 2009 lows (666-741).
• New bear market lows (below 666 on the S&P 500).

Some Positive Signs: Crude oil has shown some bullish signs by successfully testing a low, and then making an important higher high. Several markets, including some foreign stock markets and some commodity-related investments, have traced similar bullish paths in recent months. These are the markets we are focusing on at CCM as possible investment opportunities.

Some Concerns: The S&P 500 has not successfully tested a low, nor has it made an important higher-high. The odds are very high that before a new bull market can begin, the S&P 500 would have to successfully retest 741 or 666. This retest may come after higher highs, maybe as high as 940 on the S&P 500. The retest may occur during the current pullback or not for several months. Roughly 33% of the Dow 30 stocks have successfully tested a low, which leaves 67% most likely in need of a retest before a new bull market can start. Successful investors always focus on probabilities. Inexperienced investors are always looking for forecasts and predictions.

Some S&P 500 Levels To Watch: Support below the market may kick in at 770, 750, 730, and 700. Resistance above the market is at 836, 877, 885, and 944.

Leading Markets Show Signs Of Weakness: The markets shown below are some of the strongest markets in terms of technical strength. The technical strength tells us investors are more optimistic about these markets than they are about weaker markets such as the S&P 500. These markets may offer opportunities in the event we are in a new secular bull market or a cyclical bull market. While these markets all have some very positive characteristics, there are some technical yellow flags that we should not ignore.

Indicators Not Aligned With Price: In technical analysis, indicators should confirm moves in prices. For example when prices make a new high, we would like to see numerous technical indicators make a new high as well. When prices make a new high, but an indicator fails to make a new high, we have what is known as a negative divergence. A negative divergence can be an early signal that the bulls are losing some of their grip on the bears. Since March 23, 2009, we have seen numerous negative divergences in several leading markets. A single negative divergence in a single technical indicator is not all that concerning. However, the negative divergences become more significant when we see them in numerous indicators and across several markets. Below we present some negative divergences that may point to further corrections in risk assets. Since these divergences are shown on daily charts, they tell us to be cautious in the short-term. They do not necessarily send signals that these markets cannot advance after the current correction has run its course. Like all technical analysis, these divergences help us with probable outcomes – not certain outcomes. Once these divergences are cleared, positive divergences may appear which would be supportive of the cyclical or secular bull market outcomes. It is important to note these divergences appeared before markets started their current pullback.

S&P 500 Has Yet To Hold A Low: Our confidence level in the S&P 500 is not as great as markets that were able to hold above an important low and subsequently make a meaningful higher high. For those who missed it, we recently outlined some additional fundamental concerns in Stock Rally Built On Sand?.

The consensus seems to be for higher highs in stocks followed by a resumption of the bear market. While we can see this possibility, we also point out that few are acknowledging the possibility of new bear market lows. The consensus is rarely right in the financial markets. As a result, it is important to understand the big picture and observe with an open mind. If we do so, the markets will provide us with some meaningful insight into the state of the global economy.

The charts and commentary above are for illustrative and educational purposes only and are not recommendations to buy or sell any security.

VIX Breaks Below 40

Even though the market is barely up on the day at the moment, the VIX volatility index is down more than a point and has broken below 40.  As shown in the long-term chart of the VIX below, prior to the current bear market, the VIX seldomly moved above 40.  However, since last September, the VIX has remained solidly above 40.  Since the VIX is widely considered a “fear” gauge that rises along with investor nervousness, the bulls would like to see the index break solidly below 40 for a longer period of time.

Source: Bespoken Research

Gold Corrects — Buying Opportunity Coming?

by Roy Martens

The first quarter of the year has passed and it was a volatile one for the markets in general.

They plunged into an abyss straight out of the gate. But last month we saw a powerful rebound. Has the bottom for this horrible bear market been set?

Only the future will tell exactly what will happen to the markets. But to me it still seems that there’s a lot more pain to suffer over the coming months maybe even years. Despite the recent concerted stimulus decisions of the governments of the G20, I’m afraid that it will get a lot worse again after this dead cat bounce is over.

All hopes are set for the outcome of these new plans that the G20 have taken, the question we have to ask is, will these proposed measures really do the job? In our view, as long as the financial system is in bad shape it will not. The banks have to become healthy again with clean balance sheets before they can jumpstart the economy again.

Another very important issue is the level of the consumer debt, which is horrible and will only get worse when the layoffs continue at the current pace. Last Friday we saw the (official) unemployment figure in the US rise to 8.5%, a number not seen since the early Eighties. My expectation is that this rate will get still worse during the year maybe even hitting 10% in 2010 because the layoffs are continuing at a very rapid pace.

Every investor will be eying the upcoming earnings season, especially the guidance for the rest of the year and 2010. This guidance could hand in a very nasty surprise for the bulls because the US economy is a consumer economy where private consumption makes up 70% of the GDP.

But these consumers need money to spend and that’s just what they don’t have because many of them have already maxed out their credit cards and with the uncertainty of employment they will try to save every penny they can to at least make basic ends meet. Consumer spending is likely to dry up even further

This will be reflected in the upcoming company guidance bringing a lot of them in trouble when consumer spending deteriorates further. This will in its turn hurt the banks again which have to write off a lot of “bad loans” to companies, delivering another heavy blow to their balance sheets.

The current bounce in the markets is presenting a chance to raise some cash or at least get out at relatively high levels. With the general markets rising chances are there that the precious metals (and their stocks) will suffer a bit, thus handing us a perfect opportunity to pick up Gold, Silver and related stocks should this decline materializes.

All charts are courtesy of Stockcharts.com

GOLD

The weekly gold chart is presenting a mixed picture with possible positive or negative outcomes.

Negative is the double top pattern with negative divergence in the RSI and MACD, suggesting an imminent decline with targets at the rising blue line at $850 and the blue support zone at $700.

Positive is the possible formation of a flag pattern, similar to the one formed in 2008. If this pattern becomes valid a possible price target can be calculated at $1,200.

For now the positive outlook is preferred, at least as long as Gold remains above both the 17 and 34 w. MA. A decisive break below the 17 w. MA is a first warning sign that the positive outlook is in jeopardy.

SILVER

The weekly chart for Silver is showing a bullish outlook, provided the presented EW count (ABC, abc) is correct.

The pattern formed from the resistance level is taking the shape of a flag pattern which is a continuation pattern usually forming halfway during a move thus suggesting a price target of $19 to $20.

This outlook is valid as long as Silver holds above the MAs. However, should Silver break below them the presented EW count maybe adjusted because the possibility exists that this could turn into a 5 wave down. With A=1, B=2, C=3 and the current high at the resistance level being 4. Then there could be a wave 5 down outstanding with targets at $7 and $6.

OIL

This long term chart is perfectly showing the strong advance Oil made over the past years and the current fall from the high has bottomed or is bottoming at the horizontal support around $40.

If the presented EW count is valid the current bottom could be wave 2 of a higher order (or the A with B in progress and C yet to come). Waves 2 tend to retrace a lot of the gains made by waves 1 and in this perspective the current wave 2 bottom would fit perfectly.

The advance for oil began at $10 reaching a high of $147, the 76.4 % fibo level of this rise can be found at $42, so the current lows at $35 would fit within such a decline.

As long as the support level holds we can expect Oil to rise back towards the presented magenta fibo levels, with the 38.2% level as the most common for a (dead cat?) bounce in a strong decline. After such a bounce we should see another decline towards the $40 (a new wave 2) but first we have to see where this bounce takes Oil to.

USD

The weekly dollar chart shows that there might be trouble ahead for the greenback.

We can see that the last high wasn’t confirmed with higher highs in the RSI and MACD thus creating negative divergence with the price movement. Such divergence is almost always an early warning sign that a change in the trend is coming. In this case a new negative trend could be next. Confirmation of such a change in the trend will follow when the dollar breaks below the 17w and later 34 w. MA.

The last line of defence is at the blue support zone. A break hereof will most likely lead to much lower levels, a retest of the all time low at 72 for example.

The coming month will give us more clues on what we can expect later on this year.

COPPER

What a rise and what a fall we can witness in the chart.

The bull run started in 2001 at $61 and lasted until around the middle of 2008 when Copper touched the $408 level, a rise of over 550%. If we take a closer look at this rise from a fibo perspective we can calculate that the current fall that bottomed at $140 (closing base on the monthly chart) is almost a perfect 76.4% fibo retracement (at $143) of this rise.

Because waves 2 tend to retrace a lot of gained ground in waves 1, this fall could qualify as a possible wave 2 down. If this is the case we should see a wave 3 higher in the coming years. Wave 3 could take Copper to highs never imagined. Fibo level 162% of wave 1 triggers a price target of just above $700 for this wave 3!!

Although such a level seems impossible now, it could easily be reached if we experience a long period of hyperinflation down the road, which isn’t that imaginary with the current money creation going on in the world.

Watch out for fizzling rallies – Richard Russell (Dow Theory Letters)

“The following from Financial Sense: The latest 23% surge in the Dow Jones Industrials towards the psychological 8,000-level, is its seventh significant rally of 1,000-points or more, since October 2007. During the bear market from 1929 to the bottom in 1932, the Dow Industrials fell by almost 90%. There were six bear-market rallies during that stretch, with returns of more than 20%, each one fueling a sense of renewed optimism. Yet each counter-trend rally ultimately fizzled-out and unraveled, before market indexes skidded to new lows.

“As 2009 opened, three weeks before Barack Obama took office, the Dow Jones Industrials closed at 9,034 on January 2nd, its highest level since the autumn panic. The Dow Industrials melted down to as low as 6,500 on March 6, for an overall decline of 30% in two months, and to its lowest level in 12-years. The Dow Jones Commodity Index skidded to a six-year low, after tumbling by 57% since last July.

“We are now in the third Dow rally of 1000 points or more since October 7, 2007. The first over-1000 point rally started in March, 2008. The second started on November 17, 2008. The most recent over-1000 rally started on March 2, 2009. The first two rallies were wiped out with new lows in the Dow after the rallies fizzled.”

Source: Richard Russell, Dow Theory Letters, July 3, 2009.

Identifying a bear market bottom – Richard Russell (Dow Theory Letters)

“First, based on the 76 years of the Lowry’s studies, prior to a bear market bottom, it is usual for their Selling Pressure Index (supply) to decline significantly, indicating that the desire to sell is being exhausting. Secondly, Lowry’s Buying Power Index (demand) begins to climb well before the final bear market bottom.

“This is NOT what has occurred. From its March 9 low, the Buying Power Index has risen an impressive 46 points. However, and this is the big problem, since March 9 Lowry’s Selling Pressure Index has declined by a mere 13 points. Thus, Selling Pressure has only dropped half as much as Buying Power has advanced. This suggests that there is still far too much desire to sell built into this market. Any cessation of buying will therefore succumb to selling, and this is NOT how new bull markets start. Selling Pressure is still far too high.

“From another standpoint I continue to believe that this advance is not the beginning of a bull market. Primary movements in the stock market tend to have a slow, persistent plodding look. In contrast, corrective moves tend to be rapid and violent, often spurred on by panic short covering. The action of this market since the March lows has the look of a secondary correction. The speed and the steep angle of ascent is suggestive of a bear market rally.

“Since March 9, the Dow has gained roughly 940 points in nine days. Thus, the Dow has regained 15% of its bear market losses in a mere nine days. This is bear market correction-type action.”

Source: Richard Russell, The Dow Theory Letters, March 31, 2009.

Similarities with the 2002 Bear Low

by Francis Bussiere

Market keeps behaving like 2002 Venus retro low

Courtesy of StockCharts.com

Moon cycles are negative into mid April

A crash alignment for the 2002 and 2008 lows

A Venus retro alignment for the 2002 and 2009 lows

Courtesy of StockCharts.com