Post by brosin on Aug 15, 2010 20:32:06 GMT -5
“Party like it's 1933!”
4/4/09 by Brosin
Even though ‘optimistic’ is not a word I would have attributed to my outlook of the last several months (“We’re Just Sitting Around Blowing Bubbles 2/11/09″ & “We’re All In, America 3/1/09″), it was obvious even to me that a global rally was quite likely as I mentioned in my most recent post (“Dirty Jobs” 3/8/09“). Massive losses for almost 18 straight months were topped off by the straight line decline of 8300 to 6500 in the Dow Jones Industrial Average in two weeks at the end of February/beginning of March. Pessimism had reached a breaking point. Sure enough, it didn’t take much of a glimmer of hope to spark what by all means was the greatest rally ever seen. U.S. equity markets closed Friday afternoon (4/3/09) with four week gains of 25% starting later in the week of 3/9/09 – you’d probably have to be almost 100 years old to have been investing in 1933, the last time similar (better) gains were seen.
Despite an array of – literally, in many cases – the worst economic data ever, global stock markets are acting differently. Emerging markets are up over 25% as well during this period, commodity prices like copper and oil have rallied to, in some cases, 6 month highs; it seems like the world is starting to get the wheels turning again. The Volatility Index (VIX) that measures fear through options volatility dropped to its lowest levels since January and February during the last rally attempt. More telling, though, is that the short term peaks have been trending down since peak levels in November (click the Symbol to see). This seems to indicate that there is progressively less and less panic. At the current level of just under 40, it makes these coming weeks very interesting to watch.
We’ve had many ‘bear market rallies,’ as they are commonly referred to, but I would argue that each of them was sparked by something artificial (fake). Treasury/Congressional/Fed/Regulatory actions caused people to get overly optimistic in the short term despite the looming disasters and uncertainty surrounding banks. Now lies the dilemma. What sparked this rally? Really, nothing – except the market tendency to seek equilibrium (as in, when prices get low enough, there is an excess supply and prices fall). Banks came out and said they were making operating profits four weeks ago. This is meaningless – if a bank weren’t making operating profits, it wouldn’t be running at all for very long, recession or not. When we consider that almost all bank losses have been concentrated in other areas of the balance sheets, this wouldn’t by itself do much.
The market would’ve taken anything at that point, though. Any glimmer of hope, or something less than the end of the world, and people would start buying bank stocks at the prices they were at. With the Federal Reserve’s decision to monetize its debt (3/18/09) and the Treasury’s release of its long awaited Public-Private Investment Program – PPIP – details (3/23/09) that were very beneficial to Wall Street (perhaps at the expense of the Taxpayers?), financials, energy, and commodity stocks had every reason to continue the rally that began the week of 3/9 on essentially no news. This is different from prior rallies that had started after plans were announced.
Four weeks later, it is tough to say with confidence where we go from here. Stocks have every reason to pull back as people lock in their profits of recent weeks – this is the common wisdom. Stocks don’t go up in straight lines just as they don’t go down in straight lines like those weeks of late February and Early March. Yet I continue to hold strong into next week, however. As I mentioned, the VIX is at a key technical level. If it breaks through to the downside (signaling a lessening of the panic), that will be a great ‘buy signal’ for a market dominated by computer algorithm trading. Not to mention, it probably means stocks are going up. And stocks, too, are at key technical levels. The NASDAQ is now positive on the year and above 1600. The Dow is above 8000 again, and the S&P is right above its key 50 day Moving Average (840) at 841. A breakout above that level will also signal a buy. Banks are at these same technical levels, etc etc etc.
This Tuesday 4/7/09 kicks off a couple weeks of earnings announcements, when *anything* can happen. Depending on expectations, it can vary as to how the market reacts to losses and gains. In some cases, gains will be less than expected, while in other cases losses can be better than expected, etc. I’m interested to see if the banks have improved earnings on write-ups that they are allowed to take in Q1 as of the FASB mark-to-market accounting standard adjustment. Earnings are already expected to be BAD. Very bad. If they aren’t quite as bad as expected, or if many firms’ outlook is for better earnings in the future (than are currently expected), we may be pleasantly surprised this quarter. Technology leader Research in Motion (RIMM) blew away the estimates Thursday afternoon, for example. Another key signal to me is in the currency markets, which I watch somewhat religiously since I view it as a great indicator of global sentiment. The Japanese Yen has reached its weakest level against the Euro and Dollar since January, which signals a lessening of global fear. The Dollar has weakened dramatically (especially since the Fed announcement), which also signals investors are willing to take on more risk. The USD/JPY is just over 100, and the EUR/JPY is just over 135, levels that are key. Weekly closes over those levels were great signs from a sentiment perspective.
Basically, it seems like everyone is expecting a pullback and waiting to get in again near the lows so that they can take advantage of the gains we saw these past 4 weeks whenever ‘the bottom’ is reached. From what I know of history, however, few people catch bottoms by default because they usually occur when things seem the worst. In addition, they usually leave most investors in the dust looking back saying ‘what happened?’ It could be that kind of scenario. When everyone is waiting for and expecting a pullback, it signals that there are still plenty of short-sellers, and plenty of people who may panic on upmoves either by covering their shorts (equivalent to buying shares) or regular buying to participate.
We have gone down so far still, that even 25% is nothing compared to the drops. The Dow is still a long way from 14,000 – even if we get nowhere near it, which we probably won’t for many years, we still have substantial room to move to the upside. Each dip seems to be bought in relatively short order, as opposed to the massive drops we’ve been seeing for so long now. It just feels like investors (globally) are back to looking for opportunities rather than non-stop selling for days or weeks at a time. Bond prices have continued to stay very high as well (further inflating the bubble), and I would bet that if stocks continue to rally, many investors will shift out bonds and into the more attractive asset in equities.
That is still a big IF. I am being very cautious here, because I don’t know how likely it is that my scenario plays out. If the market does turn back and start heading down big, I admit that I will be jumping ship. I know there are problems on the horizon and that it’s only a matter of how much has already been ‘priced in’ to stock prices (since equities are always forward looking). It’s hard to know what is priced in and what is not, so it’s wise to be careful. Yet with the truly terrible economic data being shrugged off, I have begun to wonder if there is anything that can really scare this market so much so that the opportunistic investors waiting for the pullbacks won’t buy each time from here on out. Everyone has seen the upward pressure that can ensue, so its unlikely that there will be nearly as many panic sellers as there were in the prior year.
So I’m partying like its 1933 and not ready to give up on this rally quite yet. So many historic things have happened that I am not shocked at anything anymore. As we have only seen historic things to the downside, I tend to think it is possible (probable even?) that one of these days we will see something truly historic on the positive front. There are more people short-selling stocks than ever before, and with this week’s looming reinstatement of a modified Uptick Rule, we may see a further – and potentially much larger – short covering rally as we break through technical levels.
It’s definitely possible that things are not (and never were) quite as bad as we have thought…. I being as guilty of it as anyone. There are still (arguably major) problems on the horizon, but stock markets cause global recoveries, they are not an effect. As I said in my previous post (“Dirty Jobs” 3/8/09), “optimism can feed on optimism this spring.” And we haven’t really seen any GOOD news yet! Some glimmers here and there, but what do you think this market will do when it gets some POSITIVE economic data rather than better than expected bad data? We could be weeks and months away from that, but it seems like a recovery is becoming all the more real.
I’ll admit it; I’m more optimistic than I’ve been in at least 6 months, even from a short-term perspective – as indicated by the length of this post. If this global (this is the key, since the US has built its debt to unprecedented levels) recovery in equities is sustainable, it will cause the recovery to begin since stocks are leading indicators. As Yogi Berra said: 90% mental, and the other half physical. Global sentiment had probably never been lower; while it is still possible for things to worsen, it seemed pretty hopeless there for awhile. Just 4 weeks later, we have made substantial progress. And I don’t mean our worldwide Governments (The G20 is laughable), I mean our mindset. Pyschologically, I think we may be ready to take on whatever problems still lie ahead.
4/4/09 by Brosin
Even though ‘optimistic’ is not a word I would have attributed to my outlook of the last several months (“We’re Just Sitting Around Blowing Bubbles 2/11/09″ & “We’re All In, America 3/1/09″), it was obvious even to me that a global rally was quite likely as I mentioned in my most recent post (“Dirty Jobs” 3/8/09“). Massive losses for almost 18 straight months were topped off by the straight line decline of 8300 to 6500 in the Dow Jones Industrial Average in two weeks at the end of February/beginning of March. Pessimism had reached a breaking point. Sure enough, it didn’t take much of a glimmer of hope to spark what by all means was the greatest rally ever seen. U.S. equity markets closed Friday afternoon (4/3/09) with four week gains of 25% starting later in the week of 3/9/09 – you’d probably have to be almost 100 years old to have been investing in 1933, the last time similar (better) gains were seen.
Despite an array of – literally, in many cases – the worst economic data ever, global stock markets are acting differently. Emerging markets are up over 25% as well during this period, commodity prices like copper and oil have rallied to, in some cases, 6 month highs; it seems like the world is starting to get the wheels turning again. The Volatility Index (VIX) that measures fear through options volatility dropped to its lowest levels since January and February during the last rally attempt. More telling, though, is that the short term peaks have been trending down since peak levels in November (click the Symbol to see). This seems to indicate that there is progressively less and less panic. At the current level of just under 40, it makes these coming weeks very interesting to watch.
We’ve had many ‘bear market rallies,’ as they are commonly referred to, but I would argue that each of them was sparked by something artificial (fake). Treasury/Congressional/Fed/Regulatory actions caused people to get overly optimistic in the short term despite the looming disasters and uncertainty surrounding banks. Now lies the dilemma. What sparked this rally? Really, nothing – except the market tendency to seek equilibrium (as in, when prices get low enough, there is an excess supply and prices fall). Banks came out and said they were making operating profits four weeks ago. This is meaningless – if a bank weren’t making operating profits, it wouldn’t be running at all for very long, recession or not. When we consider that almost all bank losses have been concentrated in other areas of the balance sheets, this wouldn’t by itself do much.
The market would’ve taken anything at that point, though. Any glimmer of hope, or something less than the end of the world, and people would start buying bank stocks at the prices they were at. With the Federal Reserve’s decision to monetize its debt (3/18/09) and the Treasury’s release of its long awaited Public-Private Investment Program – PPIP – details (3/23/09) that were very beneficial to Wall Street (perhaps at the expense of the Taxpayers?), financials, energy, and commodity stocks had every reason to continue the rally that began the week of 3/9 on essentially no news. This is different from prior rallies that had started after plans were announced.
Four weeks later, it is tough to say with confidence where we go from here. Stocks have every reason to pull back as people lock in their profits of recent weeks – this is the common wisdom. Stocks don’t go up in straight lines just as they don’t go down in straight lines like those weeks of late February and Early March. Yet I continue to hold strong into next week, however. As I mentioned, the VIX is at a key technical level. If it breaks through to the downside (signaling a lessening of the panic), that will be a great ‘buy signal’ for a market dominated by computer algorithm trading. Not to mention, it probably means stocks are going up. And stocks, too, are at key technical levels. The NASDAQ is now positive on the year and above 1600. The Dow is above 8000 again, and the S&P is right above its key 50 day Moving Average (840) at 841. A breakout above that level will also signal a buy. Banks are at these same technical levels, etc etc etc.
This Tuesday 4/7/09 kicks off a couple weeks of earnings announcements, when *anything* can happen. Depending on expectations, it can vary as to how the market reacts to losses and gains. In some cases, gains will be less than expected, while in other cases losses can be better than expected, etc. I’m interested to see if the banks have improved earnings on write-ups that they are allowed to take in Q1 as of the FASB mark-to-market accounting standard adjustment. Earnings are already expected to be BAD. Very bad. If they aren’t quite as bad as expected, or if many firms’ outlook is for better earnings in the future (than are currently expected), we may be pleasantly surprised this quarter. Technology leader Research in Motion (RIMM) blew away the estimates Thursday afternoon, for example. Another key signal to me is in the currency markets, which I watch somewhat religiously since I view it as a great indicator of global sentiment. The Japanese Yen has reached its weakest level against the Euro and Dollar since January, which signals a lessening of global fear. The Dollar has weakened dramatically (especially since the Fed announcement), which also signals investors are willing to take on more risk. The USD/JPY is just over 100, and the EUR/JPY is just over 135, levels that are key. Weekly closes over those levels were great signs from a sentiment perspective.
Basically, it seems like everyone is expecting a pullback and waiting to get in again near the lows so that they can take advantage of the gains we saw these past 4 weeks whenever ‘the bottom’ is reached. From what I know of history, however, few people catch bottoms by default because they usually occur when things seem the worst. In addition, they usually leave most investors in the dust looking back saying ‘what happened?’ It could be that kind of scenario. When everyone is waiting for and expecting a pullback, it signals that there are still plenty of short-sellers, and plenty of people who may panic on upmoves either by covering their shorts (equivalent to buying shares) or regular buying to participate.
We have gone down so far still, that even 25% is nothing compared to the drops. The Dow is still a long way from 14,000 – even if we get nowhere near it, which we probably won’t for many years, we still have substantial room to move to the upside. Each dip seems to be bought in relatively short order, as opposed to the massive drops we’ve been seeing for so long now. It just feels like investors (globally) are back to looking for opportunities rather than non-stop selling for days or weeks at a time. Bond prices have continued to stay very high as well (further inflating the bubble), and I would bet that if stocks continue to rally, many investors will shift out bonds and into the more attractive asset in equities.
That is still a big IF. I am being very cautious here, because I don’t know how likely it is that my scenario plays out. If the market does turn back and start heading down big, I admit that I will be jumping ship. I know there are problems on the horizon and that it’s only a matter of how much has already been ‘priced in’ to stock prices (since equities are always forward looking). It’s hard to know what is priced in and what is not, so it’s wise to be careful. Yet with the truly terrible economic data being shrugged off, I have begun to wonder if there is anything that can really scare this market so much so that the opportunistic investors waiting for the pullbacks won’t buy each time from here on out. Everyone has seen the upward pressure that can ensue, so its unlikely that there will be nearly as many panic sellers as there were in the prior year.
So I’m partying like its 1933 and not ready to give up on this rally quite yet. So many historic things have happened that I am not shocked at anything anymore. As we have only seen historic things to the downside, I tend to think it is possible (probable even?) that one of these days we will see something truly historic on the positive front. There are more people short-selling stocks than ever before, and with this week’s looming reinstatement of a modified Uptick Rule, we may see a further – and potentially much larger – short covering rally as we break through technical levels.
It’s definitely possible that things are not (and never were) quite as bad as we have thought…. I being as guilty of it as anyone. There are still (arguably major) problems on the horizon, but stock markets cause global recoveries, they are not an effect. As I said in my previous post (“Dirty Jobs” 3/8/09), “optimism can feed on optimism this spring.” And we haven’t really seen any GOOD news yet! Some glimmers here and there, but what do you think this market will do when it gets some POSITIVE economic data rather than better than expected bad data? We could be weeks and months away from that, but it seems like a recovery is becoming all the more real.
I’ll admit it; I’m more optimistic than I’ve been in at least 6 months, even from a short-term perspective – as indicated by the length of this post. If this global (this is the key, since the US has built its debt to unprecedented levels) recovery in equities is sustainable, it will cause the recovery to begin since stocks are leading indicators. As Yogi Berra said: 90% mental, and the other half physical. Global sentiment had probably never been lower; while it is still possible for things to worsen, it seemed pretty hopeless there for awhile. Just 4 weeks later, we have made substantial progress. And I don’t mean our worldwide Governments (The G20 is laughable), I mean our mindset. Pyschologically, I think we may be ready to take on whatever problems still lie ahead.