Tuesday, August 11, 2009

Putting The Rally Into Perspective......A Record Bounce?

This is a follow up on my earlier posts But Still Better Than Expected........ & More On "The Less Bad Is Good" Mantra....... & Chart Of the Day "Today´s Rally vs Rally 1929/1930"

Wenn man so möchte ist dieses Posting ein Nachschlag zu meinen früheren Beiträgen But Still Better Than Expected........ & More On "The Less Bad Is Good" Mantra....... & Chart Of the Day "Today´s Rally vs Rally 1929/1930"

A RECORD BOUNCE? David Rosenberg

The S&P 500 has rebounded 49% from those March 9 lows. Imagine how abnormal a 49% rally over a five-month span is — it’s unprecedented back to the 1930s. In the last cycle, it didn’t happen until February 2004 — 18 months into that bull phase where again there was tremendous policy stimulus and an oversold low to climb out of.

In addition, household credit was expanding rapidly. Even coming into what was a secular bull market in 1982, it took a good seven months to rally 49%, and that was with the benefit of a V-shaped economic recovery.

Going back to 1950, it has taken an average of around 18 months for the market to rebound 49% from a recession trough, not five months as has been the case thus far.

Let’s examine what the macro landscape usually looks like at that magical +49% point in the equity market rally:

• Real GDP had expanded on average by 4.5%
• Employment rebounded an average of 850k
• The ISM manufacturing index had firmed to an average of 56.2 (the lowest print by this juncture was 53.9)
• Corporate profits had recovered 12%
• Bank lending rose an average of 5%

In other words, the market is way ahead of itself, because, as of the latest data points during this 49% rally:

• Real GDP is trying to make a cycle low
• Employment is trying to make a cycle low
• The ISM is off the low but still sub-50, at 48.9
• Corporate profits are still trying to make a cycle low
• Bank lending is still trying to make a cycle low

We have never before witnessed a stock market rally of this magnitude over such a short time frame and absent anything more than tentative signs of economic improvement.

The only rally of this magnitude was the wild bear market rally ride in 1930, which was followed by a resumption of the decline that finally bottomed 82% lower in 1932.

This is the most speculative momentum-driven equity market since the early 1930s. Make no mistake, the economy is getting better but most of the diffusion indices are still below the 50 cutoff and many of the economic indicators are still in negative growth terrain

But what we have on our hands is a jobless, revenue-less, income-less, profitless and consumer-less recovery. It’s a one of a kind.

The equity market tends to bottom 3-6 months before the recession ends; normally it is four months. The S&P 500 bottomed in March, and we are now four months into this rally and while the media have declared the recession to have ended, none of the four classic ingredients that go into making that call have yet to bottom.

Hence, Mr. Market may well be way ahead of himself on this one. No doubt that the market was priced for extremely bad news at those March lows, but let’s face it, the news turned out to be pretty bad, especially for those 2.2 million people who lost their jobs since that time. That’s more than the entire March 2001-June 2003 down-cycle — in just five months.

> Just today three major German financial newspapers ( FT Germany, Handelsblatt und Welt ) had all bullish stories why stocks have room to climb higher.....At least they didn´t have their stories on the cover.... This would have triggered a perfect signal to short the market....;-) The FAZ seems to be regular readers of Zero Hedge and is therefore less "euphoric"......You really have to be brave to be long this market....... The risk/reward isn´t quite "balanced" right now......

> Im Vergleich ( DAX 5400 ) dazu die heutigen Artikel der FT ( siehe Acht Gründe, warum es weiter aufwärts gehen könnte. ) , der Welt ( siehe Die Börse beweist, dass die Krise bald vorbei ist) & des Handelsblattes ( siehe Charttechnik verspricht steigende Kurse ) Immerhin haben es die Beiträge nicht auf die Titelseiten geschafft...... Ansonsten wäre heute sicher der ideale Tag um short gehen..... :-) Lediglich die FAZ ( siehe Ohne Umsatzzuwachs keine Gewinnsteigerungen ) ist nicht ganz so euphorisch. Sieht so aus als wenn einige in der FAZ Zero Hedge Fans sind....... Ich bin mehr denn je der Meinung das wirklich nur ganz Wagemutige long sein sollten....Das Chance/Risikoprofil ist "ÜBELST"........

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Blogger jmf said...

Rallying on Falling Breadth, Volume

9:42 AM  
Blogger jmf said...

The Pragmatic Capitalist

10:18 AM  
Blogger jmf said...

Today's chart presents the Dow divided by the price of one ounce of gold. This results in what is referred to as the Dow / gold ratio or the cost of the Dow in ounces of gold. For example, it currently takes 9.8 ounces of gold to “buy the Dow.” This is considerably less that the 44.8 ounces it took back in 1999. When priced in gold, the US stock market has been in a bear market for the entire 21st century and is currently trading 78% off its 1999 highs. The recent five-month rally, however, has the Dow (priced in gold) putting in a significant test of resistance of an accelerated downtrend that began in mid-2007.

Dow / Gold Chart Of The Day

11:29 AM  
Blogger jmf said...

The only reason why the markets are still hanging in....

Excess liquidity thesis gains traction as financial markets soar

Money might solve this puzzle. More precisely, in their anti-deflationary fervour, central banks may be creating more money than depressed economies require. The surplus creates "excess liquidity" - which may be feeding a new series of stock, commodity, property and bond bubbles.

In addition, the standard measure of money supply, broad money, currently looks far from excessive in most major economies. In Japan and the eurozone it is growing at low annual rates of 2.5pc and 3.5pc respectively. Central banks see their efforts as compensating for a breakdown in the money multiplier of bank lending and as an effort to avert deflation and further economic decline.

But the very decline in GDP may be causing the excess money problem. Economic activity has contracted sharply and consumer prices are deflating, so a constant stock of money buys more, in real terms, than it did a year ago. This deflationary money adjustment may be generating excess liquidity - and feeding buoyant markets.

7:13 PM  
Blogger jmf said...

After Tuesday's bell, NYSE Euronext's NYSE Group Inc. said short interest on the New York Stock Exchange fell in the second half of July from the first half, to the lowest level since late February. Short interest fell to 14.03 billion shares from 15.64 billion shares. Short interest on July 31 was equal to 3.67% of total shares outstanding.

7:18 PM  
Blogger jmf said...

Now Let's Look At The Recoveries In The 1970s And 2000s

3:27 AM  
Blogger jmf said...

The Recession Is Over!*

Apparently, it's over. Out of 27 economists, not a single one sees GDP falling in 2010. Not sure if that is comforting.

Warning: Past performance may be an indication of economists' future results.

3:47 AM  
Blogger jmf said...

Update via Naked Capitalism

89% of economists surveyed by the Wall Street Journal also though (at the time) that the oil price rise of early 2008 was not a bubble.

4:19 AM  
Blogger jmf said...

Nice to see that Doug Kass is also "cautious".....

Kass’s Summary of Bearishness
via Barry

5:40 AM  
Blogger jmf said...

Stock Bulls Increase as Survey Shows Most Optimism in Two Years Bloomberg

Investor sentiment was within 1 point of reaching 50 in the U.S. and Germany, the level that shows participants expect prices to rise in the next six months. Confidence in the Standard & Poor’s 500 Index, the benchmark gauge for American equities, increased to a three-month high of 49.7, twice the record low of 23.5 in January 2008. For Germany’s DAX Index, the reading of 49.5 is the highest since December 2007, the second month the survey was conducted. Spain’s reading of 40 was the lowest among those in the survey.

Confidence in Germany’s DAX rose the least, advancing 5.3 percent to 49.5. The stock index has surged 45 percent since March 6, pushing it to the most expensive level relative to earnings in more than five years.

The sentiment measure for Brazil rose 12 percent to 68.1, the highest of the 10 countries. The nation’s Bovespa Index has jumped 49 percent in 2009 on speculation a rebound in commodity prices and record-low interest rates will fuel growth in Latin America’s largest economy. Confidence in Mexico climbed 6.7 percent to 53.9.

In Japan, the Nikkei 225 Stock Average has advanced 48 percent in the past five months. The confidence gauge for equities in the world’s second-biggest economy rose 13 percent to 53.7 percent.

6:22 AM  
Anonymous eh said...


Momentum and tape players who are good at it are probably doing pretty well. Very tough times for anyone who pays less attention to technicals and more to fundamentals -- hard to know that to do. It's too difficult to believe that all that 'wealth' destruction could be overcome so quickly.

10:19 AM  
Blogger jmf said...

Moin Eh,

i agree. Momentum rules.....

I have stayed on the sidelines for almost 6 weeks now....

Gold & NOK are looking good.....

11:00 AM  
Blogger jmf said...

As usual a good piece from Mish

Corporate Bond Spreads Key To Continued S&P Rally

"Access To Debt Markets Keeps Zombie Corporations Alive"

10:05 PM  
Blogger jmf said...

CNBC Kudlow.....Same Charts but with Targets north of 1250.....

Two Uberbulls Ed Yardeni, Yardeni Research ; Laszlo Birinyi, Birinyi Associates )

6:04 AM  
Blogger jmf said...


Thus, when we look at the dividend yield of the S&P 500 at the end of U.S. recessions since 1940, we find that the average yield has been about 4.25% (the yield at the market's low was invariably even higher). Presently, the dividend yield on the S&P 500 is about half that, at 2.14%, placing the S&P 500 price/dividend ratio at about double the level that is normally seen at the end of U.S. recessions (even presuming the recession is in fact ending, of which I remain doubtful). At the March low, the yield on the S&P 500 didn't even crack 3.65%. Similarly, the price-to-revenue ratio on the S&P 500 at the end of recessions has been about 40% lower than it is today, and has been lower still at the actual bear market trough. The same is true of valuations in relation to normalized earnings, even though the market looked reasonably cheap in March based on the ratio of the S&P 500 to 2007 peak earnings (which were driven by profit margins about 50% above the historical norm).

Stocks are currently overvalued, which – if the recession is indeed over – makes the present situation an outlier. Unfortunately, since valuations and subsequent returns go hand in hand, the likelihood is that the probable returns over the coming years will also be a disappointingly low outlier. In short, we should not assume, even if the recession is ending, that above average multi-year returns will follow.

The primary element that is favorable at present is speculation – excitement over the prospect that the recession is over. Investors are presently anticipating the good things that have historically accompanied the end of recessions (strong investment returns and sustained economic growth), without having in hand the factors that have made those things possible (excellent valuations and a large output gap coupled with strong structural growth in potential GDP).

10:42 PM  
Blogger jmf said...

The "Dumb Money" indicator continues to hit new extremes Technical Take

The Rydex market timers continue to be bullish and leveraged to the extreme. And to round out our sentiment analysis, selling by company insiders has hit extremes as well. It is the perfect trifecta. Whether the perfect trifecta becomes the perfect storm (again) for investors is yet to be determined.

The "Dumb Money" indicator is shown in figure 1. The "Dumb Money" indicator looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investor Intelligence; 2) Market Vane; 3) American Association of Individual Investors; and 4) the put

The "Dumb Money" Chart

6:05 AM  
Blogger jmf said...

Bears prowl Wall St as insiders dump stock

Company executives are selling stock at a rate not seen in two years after a near 50 percent rise in the S&P 500 from a March 9 low. That suggests directors and managers may think stock prices are nearing the top end of their range in the current economic climate.

6:06 AM  
Blogger jmf said...

Industrial Stocks Living in the Past WSJ
In other words, that the sector largely managed to beat beaten-down earnings estimates in the quarter has fueled renewed optimism on the future.

But based on what? Results from bellwether Caterpillar demonstrated the problem perfectly. It beat the consensus estimate threefold, but largely because of cost cuts, a lower tax rate, currency gains and accounting gains on shrinking inventories. Meanwhile, its revenue slumped 41%, and the company was reticent on the outlook for 2010. That lack of clarity hasn't stopped investors from pushing Caterpillar's stock price up to 26 times the average 2010 earnings estimate.

10:30 PM  

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