Saturday, April 11, 2009
Beware the Ides of April …
It’s not just tax time. It’s the time for false hopes and for the people who take advantage of those false hopes.
Stock market rally by the DJIA:
Beware of bear market rallies. There is little productive enterprise to support a bull market; this is a rally promoted by firms seeking to unload stock. That all companies aren’t going belly- up simultaneously does not constitute a bull market. Another DJIA rally:
A precedent; a proportionately large bear market rally in 1929 after the Great Crash. When that rally petered out, the Dow continued its measured retreat … all the way to 40.56 … from a high of 406! That’s a 90% decline. There were several bear market rallies along the way to the final low. Like now, there was nothing to propel business prospects during the early 1930’s. Like now, employment was cratering. Houses and farms were being foreclosed and businesses were failing. There were no ‘big ideas’ that could generate business activities downstream, only government bailouts.
Not much in the way of a big idea; a bailout …
That was then, this is now, Doug Short via Automatic Earth:
The S&P 500 Demolition Derby
by Doug ShortThe S&P 500 continues its demolition derby with the 50- and 200-day moving averages and the 2009 opening price level. The index seemed poised for an extended winning streak, but it has taken some major hits of late. This weekend update — the first of the Q2 earnings season — shows that the S&P 500 is below all three major indicators. The rally in the last 30 minutes of the week put the index very near a close above the 200-day moving average. But it ended up a fractional point shy. Check out this photo-finish close up.
Earnings expectations are low this season, which may work to the advantage of the market. But cautious outlooks may undercut carefully orchestrated upside surprise.
We’ll keep an eye on this “banger race” to see what happens.
Note how the volatility (top bar ‘VIX’) and the volume (bottom bar) are in steady decline.
Willem Grooters in the Netherlands occasionally emails me his thoughts on the current S&P 500 relative to the Dow Crash of 1929. Mr. Grooters draws a line between the 1929 high and the 1932 bottom, noting the coincidental oscillation of today’s bear around this line. His analysis of trailing 12-month earnings suggests that this pattern may continue — that the current correction could well take us back below the line.
I should emphasize that the line on this chart is arbitrary — the shortest line between two dots. It’s not a regression, and the only thing it shares with the S&P 500 chart is the 0% starting point. However, if we let Excel plot a linear regression on our current bear, the slope is remarkably similar to Mr. Grooters red line:
Thanks, Willem, for sharing your work.
Addendum: For an apples-to-apples comparison, here is the same chart with linear regressions for both bears.
AE posits that the next down leg will be very damaging. I tend to agree. The market has been supported by program trading and a short squeeze rather than an organic flow of investment funds from the productive part of the economy … the lower part.
If there are any retail investors left in the USA economy or stock market it would be a miracle similar to a weeping Jesus in Lourdes!
Workers lose their jobs and find themselves on the door stoop of poverty. How can this be the force behind any kind of economic recovery or rally? What will be accomplished is the stripping away of the facile and dishonest mask that so far has disguised the behavior of the wolves of finance; Obama and his enablers as well as those he enables.
I cannot say what will trigger the deleveraging event. It may be an earnings report, although the (suspected) earnings of the largely nationalized banks will be strong. Some failure to meet expectations such as Walmart, might spook the overbought edifice.
What afterwards? With trillions already committed, an October, 1987 surprise might leave those who would rescue us without the means to do so. Certainly, if there is when this deleveraging takes place, the parties and the public will know that the establishment’s efforts have been a tragic fraud.
The market call here is long flaming brands and pitchforks.