Tuesday, April 14, 2009

Bear or bull market? The Gurus weigh in.

Well, given that everyone's been trying to decipher the market trend, I’ve tried to cull together predictions from famous market investors and technicians. (Caution: lengthy!). A number of credible strategists have called this a bear market rally and not a new bull, with an intermediate term price target around 875-880. The markets could rollover in the next week or so.

So let’s see what they have to say:

      Ambrose Evans-Pritchard "Enjoy the "bear-trap" rally on global bourses this spring. But remember, we have only just begun to see the mass lay-offs and hardship caused by this slump. The politicians will act to save their skins. Markets may not like the result."

      Marc Faber "We need some kind of correction, maybe around 5 to 10 percent, and after that we can maybe rally more into July. Gold will be “dead money” for the next three to six months. Bonds are entering a long bear market and should be avoided. I think the market became extremely oversold March 6, when the S&P touched 666. That was probably a false breakout on the downside from the previous low of 741, reached Nov. 21. On March 6, most stocks didn't make new lows from November.

      Sentiment had turned extremely negative. So the market wanted to go up anyway. I think this rally may have more legs, because if you print money, it liquefies the system for a while, and asset prices move up accordingly."

      Faber forecasts the S&P rising to around 880.

      Louise Yamada In the current move, Yamada notes that the Dow Jones Industrials and the Standard & Poor's 500 have broken above respective 10-year support levels of 7286 and 777; rallied into the support levels where the averages broke down last November; and moved above their 50-day moving averages. All are positive developments from a technical perspective.

      Yamada would like to see a penetration of downtrend lines in the S&P and Dow and a break above their December peaks. Still, the 200-day moving averages and downtrend lines from peaks of a year ago present formidable resistance. The charts show that perhaps only 10% of stocks are trading above their 200-day moving average. That measure is a widely watched indicator of a medium-term trend; as long as the current price is below the 200-day moving average, it's hard to argue that a sustained uptrend has started. Similarly, many stocks and averages still remain below their downtrend lines.

      As for numbers, "the first step is 945" on the S&P. “I'd be a lot more comfortable with 1012," which also seems miles away but was where the S&P traded in early October -- after the Lehman Brothers bust.

      "What you'd really like to see is the 200-day moving average turning up, and then some backing and filling," she continues. That means a considerable period of healing, as opposed to the hopes for a sharp recovery off of the early march lows. "You can't fix in six months what's happened over six years."

      Ultimately, Yamada remains concerned about the technical damage wrought by breaching of the market's 2002 lows, which could make the recent advance a "bear trap." The current market differs from other major turning points, as in 2003 or 1982, which had major groups that had gone through long consolidation periods.

      Niall Ferguson "Only somebody who studies financial history could say, as I was trying to say, ‘Look, something as big as the liquidity crisis of 1914 or as big as the banking crisis of 1931 is imminent.' We don't really have a great many options here. If we stay the present course, you're going to see the tailspin continue. To be effective, a large-scale restructuring of household indebtedness would need to be mandatory. The Great Depression was initially a U.S. financial crisis. But what made it a depression was its global contagion, and then the breakdown of trade and the retreat into protectionism. All of that can happen. All of that is in fact happening with terrifying speed."

      Richard Russell "I was wrong. It looks as though this rally has legs. Lowry’s Selling Pressure Index has stopped rising and now appears to be topping out. At the same time, Lowry’s Buying Power Index is in a rising trend. The look of the Lowry’s chart suggests that the [short-term] direction of least resistance is up."

      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.

      George Soros "The recent rise in global stockmarkets is a bear market rally because we have not yet turned the economy around. This isn’t a financial crisis like all the other financial crises that we have experienced in our lifetime."

      "I don’t expect the US economy to recover in the third or fourth quarter so I think we are in for a pretty lasting slowdown." He added that there might be “something” in terms of US growth in 2010. "The recovery will look like ‘an inverted square root sign. You hit bottom and you automatically rebound some, but then you don’t come out of it in a V-shape recovery or anything like that."

      James Montier "In general, sustainable post-bubble rallies are not led by those stocks which are the bubble darlings. The prominence of emerging markets, mining and financials in the recent rally gives me pause for thought. Especially when neither emerging markets nor mining are at bargain basement levels of valuation.”

      Albert Edwards "Apparently there are green shoots to be spotted. Not in Japan there ain't. We don't fully realise in the West what a catastrophic collapse Japan has suffered. They have paid the price for a strong currency. In fact, the Western nations have exported much of their depression eastwards. Going forward, the unfolding collapse in the yen will unleash an intensification of the depressionary forces in the West. Toasted green shoots anyone?"

      There is disbelief in Edwards' prose about how so many of the commentators now spotting green shoots turn out to be the same commentators who failed to see the current economic disaster unfolding in front of their eyes. Even the largest and most rapid economic collapse in a generation has failed to wipe out their deeply ingrained optimism.

      Yet the West has effectively dumped a large part of its economic woes on the Japanese by devaluing against the yen. That will come back to bite. It is almost certainly the case that the horrendous effects on jobs, corporate bankruptcies and bank balance sheets have simply not yet been seen given that we are still so early into this downturn.

      In Edwards' words: "We have only just begun."

      Laszlo Birinyi "Buying stocks is like crossing Fifth Avenue when the light is red.You might make it, but the odds are not with you.

      Mistaking a temporary jump for a sustained bull market can be costly. In 41 so-called bear market rallies since 1928 -- gains of more than 10 percent that are later wiped out -- equities fell an average 25 percent after peaking.

      Mohd. El-Erian "Investors can still lose a lot of money in the stock market, but US government bonds aren’t the solution either for those seeking safe havens. Certain bonds aren’t worth owning, like government bonds for instance"

      "I am very underweight equities," he said, adding that he has cut his exposure to stocks to 30% compared with around 60% in normal market conditions.

      Jim Rogers The rally in global equities has been “powerful,” though problems in financial markets may cause indexes to revisit lows. When you see a rally like this coming off the bottom, it lasts longer than anybody expects. I would expect to see more problems, probably this fall.”
      "The world is in difficult economic times and politicians keep making mistakes so I don't see stock markets making their final bottom for a while. The global stock market might have hit rock bottom but it is possible that the bottom is in fact deeper. It will be awhile until we see the actual bottom."

      Nouriel Roubini "There's still bad news ahead for the U.S. economy -- and by extension for Canada -- and the bear market for stocks is not over yet. There will be a light at the end of the tunnel somewhere down the line, later rather than sooner. Macro news, earnings news and financial shocks are going to be worse than expected and that's why I believe this is still a bear market rally"

      "The stock market is a bit ahead of the real macroeconomic and financial news. We’ll have some major banks going belly up that will need to be taken over."

      Art Cashin This market is a little overextended here. It’s option expiration week I’m a little nervous for the next several days.

      David Rosenberg As best we can tell, the market is now pricing in $70 of earnings (operating) [for the Standard & Poor's 500], which would represent a 75% surge from where we are today. Not likely, in our view,"

      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.

      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.

      Investors seem to have confused an actual recovery with the fact that the economy isn't detonating anymore. Markets right now are dangerously extrapolating an improvement in the rate of change to an improvement in the actual level of economic activity. These are two very different events."

      Michael Kahn "Jason Goepfert, proprietor of sentimenTrader.com points out that the AAII survey of individual investors and other sentiment-related indicators -- specifically put/call ratios and Rydex mutual-fund asset flows -- are indeed showing a quick acceptance of the rally.

      This is why I think that the next decline that takes place will be psychologically devastating for investors. And devastated investors will stop looking for a bottom. They will turn off the financial media, resign themselves to their losses and work on their hobbies instead.

      The widely followed relative strength index has barely been able to escape a merely neutral level, and that suggests that there has not been a lot of force behind the move. In fact, over the past three weeks, the market has been able to rally three consecutive days only one time. That is not how a rally should work.

      When we examine volume, we see that the number of shares changing hands each day has been declining, too. This leads to the conclusion that it was a lack of selling, rather than a surge in buying, that is behind the gains. Again, that is not how a rally should work.

      Put together the mediocre momentum, falling volume and sentiment that shows the rapid loss of fear and we get a recipe for a selloff."

      BCA Research :Global equities have likely made their recessionary lows. Emerging markets and commodity plays will outperform. The equity markets of the U.S. and the U.K. will do better than euro area stocks. Japan is a trading market, one that is due for a period of outperformance.”

      Teun Draaisma "We continue to prefer cash over equities as we have done throughout most of this bear market, and we continue to prefer earnings stability, strong balance sheets and low valuations. After the recent strength in equities, we now move 5% out of equities into bonds. Thus, our new asset allocation is +5% overweight cash, neutral bonds, -5% UW equities."

      "We have to decide whether this is towards the end of another bear market rally that we should sell into now that hope has grown, or the start of a much larger advance, maybe even a new bull market. Our decision is to sell into strength now."

      "Other reasons to sell: after the biggest valuation overshoot ever, in 2000, we have not had a meaningful valuation undershoot. Weekly unemployment claims have continued to rise. Some fixed income markets have fallen to new lows even recently.

      Cleve Rueckert, a Birinyi analyst. “Steeper jumps for small-cap stocks one month into a rally are signs of indiscriminate buying and usually come before equities fall”

      “It’s unusual for a new cycle to start with such an abrupt gain. Bear market rallies are broad. Everything goes up really sharp, really fast and not necessarily for a particular reason.”

      Kevin Lane Fusion IQ “It is a very fine line between a rally extension call and a retest call, though we are leaning towards the former after a pullback/pause. However, since both calls - rally or retest - are plausible we continue to suggest investors tighten up stops and portfolio VAR (Value At Risk) until more evidence unfolds. Until more clarity occurs either technically or fundamentally, I can think of worse things in the world than locking in some gains or getting stopped out at a profit on trailing stops.

      “So over the next few sessions watch the skew of decliners to advancers and down to up volume. As long as we don’t get ratios of 5 to 1 or higher on both indicators the likelihood of a retest in the near term is lessened.”

      Barry ritholtz: “ those investors who made recent bets that Green Shoots are a great entry for investing - well, they may be somewhat disappointed …”

      Bear markets call for a very different set of plays: You sell the rallies; higher prices are opportunities to sell equities at premium valuations. Most buys are disappointing, as prices eventually go lower. Buy & hold is a losing strategy – trading what the market presents to you is the best risk management strategy.
      The goal during bull markets is to grow your capital; the goal during bear markets is to protect your capital.

      Jordan Kotick Barclays Capital's head of technical strategy: "We believe it is a bull market in the second quarter. We perhaps think it will be a bull market in the third quarter as well. If you are a very long-term trader, you will probably still assume it is a bear market and we think rightfully so."

      Dylan Ratigan
      So is this a new bull market, or is this another suckers' rally?

      "Suckers' rally. No question. That's not an indictment of the judgement of the market. That's just my perception of the ability of the banks to function in a timely fashion, the ability to create meaningful amounts of jobs in the immediate future, and the as-yet unrecognized meaningful losses to come in commercial real-estate and other asset classes... We've gone through a transition where things were getting bad in a freefall, and now they're just getting slowly worse. So it's a transition from jumping out a plane without a parachute, and now, after a year of free-fall, we've pulled the parachute, which feels a hell of a lot better than the freefall... I think we're dealing with a problem that has a few years in it, not a few months."

      Jeff Saut “While many pundits term the current rally a short-covering bear market rally, we have noted that ALL new bull markets begin as short-covering bear market rallies and have referenced the late 1974 “undercut low” affair as an example. Therefore if, and we repeat “if,” the DJIA and D-J Transportation Averages can better their early January 2009 closing highs of 9034.69 and 3717.26 respectively, it would be the first Dow Theory “buy signal” in years and should be viewed positively.

      So far the “buying stampede” is still in force since there have been no pauses/corrections that have lasted more than 1 – 3 sessions. As often stated, that is typical of such skeins. But, the equity markets are very overbought as can be seen in the attendant chart. Consequently, we are again cautious. If I could script the action from here, it would call for a “trading high” this week followed by a pullback, which holds above last Monday’s (3-30-09) intraday low of 779.81 (basis the SPX), and then a re-rally. In that re-rally, if the SPX fails to trade to higher highs, it would be a large red warning flag.

      We still feel a pullback will occur in the weeks ahead. Our sense is that such a correction, if it holds above March lows, creates a buying opportunity for a tradable rally into the summer. The sentiment of “selling the bear market rallies” could very well give way to “buying the dips”

      Royce Tostrams "We see some improvement because the falling trend has been broken and we have formed a series of higher bottoms in the past few weeks, however, upside potential is limited."

      "The first target for the index is 878, while the second target is about 944. For the next three to six months, I expect a new sideways movement between 700 and 900. This would not be a new bull market, but it would be a sideways market. Investors have to be very selective to get some gains, but they can't stay in the market too long because upside potential is limited."

      John Hussman Market action continued to demonstrate good breadth (advancing versus declining issues), prompting us to hold about 1% of assets in index call options on that basis, but the overall price-volume behavior still appears more consistent with a standard bear market rally, punctuated by periodic short-squeezes.

      Very simply, new bull markets are generally not widely heralded, and investors should be awfully suspicious when there is a consensus that “the bottom is in.”

      “Strong intermittent advances are typical during bear markets, and can often achieve gains of 20% as we've seen in recent weeks, and sometimes substantially more. But the very existence of bear market rallies can be a problem for investors, because they clear the way for fresh weakness. The scariest declines in bear markets are typically the ones when investors think they are making progress and recovering their losses, only to see stocks go into a new free-fall. The largest losses during bear markets tend to come on the heels of overbought advances, and our measures presently don't offer happy green-shoot optimism that the market's difficulties are now behind it.

      On the basis of market action, one of the features of the recent advance that has me concerned is the unimpressive, waning trading volume that we've observed. A strong advance on heavy trading volume is a measure of determined sponsorship in the face of disagreement. A strong advance on waning volume is probably a short-squeeze – forced purchases in the face of sellers who have temporarily backed off. Moreover, stocks are currently overbought to the same extent that they were near the end of the bear market rallies we observed during the 2000-2002 decline.