Use access key #2 to skip to page content.

Bull Market vs Bear Market Rally.



May 09, 2009 – Comments (23)

OK, I'm gonna try to give my best explanation of why I think this is a Bear Market Rally and Not A Bull Market.

I'll start with the arguments for a Bull Market.

1) The fundamentals have improved. Bulls will submit that the market is being led upward by the same companies that led them down, the financial institutions. They'll mention that those companies have turned the corner so fast that many are now trading near their 52 week highs.

2) A 2 month trend in the market. It's hard to argue with momentum.

3) A slight increase in institutional investment. The guys that are getting paid to make money are starting to buy into the rally.

4) Increasingly good government reports. The outlook from the government is looking better.

5) The VIX (the fear index)  is in about the middle of it's range and dropping.

Now my arguments...

1) The banks are all paper tigers! If I apply the current accounting rules to my own household, My home is worth at least what I paid for it, not what somebody will actually buy it for today. I make money because I have debt. I really don't have much debt, but if I did, I could report the drop in interest rates as if it were income. If I don't like the way my income looks on paper, I can simply adjust my fiscal year in a way to make the bad things disappear. I can avoid putting my liabilities into my budget all together if I want too, which makes my bank account look much better. The downside on all of this is that reality really hasn't changed, and when I run out of money I'm forced to report this stuff, that's OK though, because rather than loan my money out, I'm hoarding cash to avoid an Enron type situation for a little while at least.

2) Back when cable TV was relatively new, my cable company gave me free HBO for 2 months. I took this as a sign that they knew that I liked to watch movies a lot, but didn't want to pay for the experience, and this free channel thing had legs. I was wrong.

3) This one, I can't argue. I don't know if they are taking advantage of a Bear rally or Bull market, but I do know that they still have a huge amount of cash on the sidelines, and I'm taking that as a sign that they don't know what they are doing yet either.

4) Lies. Every unemployment report is getting revised upward months later. Winks and nods are given to corporations to lie on their quarterly reports as well. The CEO of BAC was forced by the government to lie to his shareholders to prevent the truth from effecting the market. (A felony)

5) My favorite one. Most novices take the meaning of "fear index" too literally. It is a measure of fear, but it's a measure of fear of speculation and not a fear of the market. There is fear in both Bull and Bear markets. I look at the VIX a lot because I trade options. I like to measure the volatility of the options that I'm trading vs the volatility of the best of the S&P. Sometimes this allows me to take advantage of market sentiment to find poorly priced option prices. I can tell you with almost certainty that the VIX will hit 20, but you will probably see the the biggest spike you're ever going see in your lifetime shortly after.


I'd love to hear comments or arguments.

23 Comments – Post Your Own

#1) On May 10, 2009 at 2:24 AM, awallejr (39.10) wrote:

I'm just waiting to see if S&P breaks above 944.  If it does then this could be a halt to the massive dropping because then we would have reached a higher high from last high. 

You can make all the guesses you want, but until we see how future GDP plays out all we can do is guess.  Personally I think we saw the worse lows in GDP last 2 Qs.  I still expect a drop next Q, but hopefully not as bad.

Almost everyone expects inflation down the road, so oil/commodity would be the play.  And ironicaly when they rise the market does. 

No I don't think this is a bear rally, those already happened.  I'm not on the bull run bandwagon, but I am on the bottom and improving bandwagon.

If you are betting on another crash to DOW 6000 in the near future, you are going to get hurt imo.  Close the shorts on the next down day and play the energy sector for at least a month maybe 2.


If there is going to be a further crash, odds are it will happen 2010 since then we will know if the private sector is improving on its own.  Government can only stimulate so long. 

Report this comment
#2) On May 10, 2009 at 2:57 AM, uclayoda87 (28.75) wrote:

This is more of a unicorn market rally, based on a mythical creature that doesn't really exist.  The deteriorating economy associated with a sharp two month rise in the stock markets, suggests a successful market manipulation.

Like some Harry Potter magic:  As long as the government keeps waving its wand, the markets will continue to be levitated.  But as soon as the government's concentration is broken by some other pressing event, the markets will fall.

Report this comment
#3) On May 10, 2009 at 3:55 AM, walt373 (99.88) wrote:

I don't think a real "bull market" is possible in the near future. The recession we are facing now is not your garden-variety recession, but comparable in magnitude to the economic crises of the 30s and 70s. This almost everyone can agree on.

And because the problems in the economy are way more serious and far-reaching than in a normal recession, the consequences of this recession are going to be worse. This is only logical. So it doesn't seem plausible that we will get back on our feet and exit this recession healthy as ever, as we would in a normal recession.

Basically the world economy has just realized it didn't have as many assets as it once believed. Its profits were produced by these imaginary assets. To get back to the level of profits we were once at, we will need many years of rebuilding our assets. In a normal recession, profits drop because of a cyclical downturn, so it's only temporary. In the current recession, profits dropped due to a permanent impairment of assets, so these profits are gone for good at our current asset level.

I believe the best case scenario is many years of no growth. And the worst case scenarios, well... the doomsayers on TMF have made it clear what they are.

Also, looking at the current stock valuations... prices are not cheap enough at this point to produce a real bull market when there is no growth in the economy. The valuations of stocks suggest that healthy and sustainable growth for the whole economy will return by next year, an outcome that seems pretty unlikely.

Report this comment
#4) On May 10, 2009 at 10:28 AM, portefeuille (98.86) wrote:

some charts here

Report this comment
#5) On May 10, 2009 at 10:48 AM, IIcx (< 20) wrote:

rec Chris and great link portefeuille

also see this one: 


Report this comment
#6) On May 10, 2009 at 12:43 PM, awallejr (39.10) wrote:

That was a great link Portefeuille.

Report this comment
#7) On May 10, 2009 at 12:49 PM, IIcx (< 20) wrote:

here's another interesting article I just ran across: 

I hate the "D" word but many of the points are interesting. 

Report this comment
#8) On May 10, 2009 at 1:08 PM, Ibeatmykids (81.21) wrote:

i also think it is a bounce rally.  While we won't be going into a golden age anytime soon, we have already hit bottom.

Report this comment
#9) On May 10, 2009 at 10:04 PM, huddaman (99.07) wrote:


 Great article.

Market Rally : Too much too early Report this comment
#10) On May 10, 2009 at 10:22 PM, portefeuille (98.86) wrote:

CDS report: rally presses on
Posted by David Oakley on May 08 12:38.

European credit derivatives continued to rally on Friday amid rising confidence as the US stress test results failed to upset the markets.

Markit’s iTraxx Europe index, made up of 125 investment grade names, narrowed to 121 basis points - 10bp tighter than Thursday’s close and more than 20bp lower on the week.

Markit’s iTraxx Crossover index, made up of 50 mostly high-yield names, narrowed to 718bp - a 12bp fall from Thursday’s close. It has tightened about 100bp this week.

The credit rally was originally propelled by the surge in equities, although the tightening of spreads on investment grade and high yield corporates and financials is now helping to boost shares.

Flows were relatively light, however, as many traders sat on the sidelines ahead of the US payrolls number this afternoon, which has the potential to scupper growing confidence across asset classes.

Significantly, the credit markets have outperformed the equity markets since the start of April, which suggests the rally in shares prices may prove to be longer lasting than previous surges higher.

The iTraxx Crossover has rallied 25 per cent since April 1, when it closed at 962bp, compared with a rally of about 15 per cent on the FTSE Eurofirst 300 over the same period. Although this is a crude measure, it provides a simple comparison between the two markets.

(from here, for a chart see this (iTraxx Europe index was at 136.5 bps then (Tuesday), at 121 bps on Friday (see above)))

Report this comment
#11) On May 10, 2009 at 10:46 PM, portefeuille (98.86) wrote:

(I do not necessarily agree with the reasoning as to "causality" in the article above, but it might be "fair to say" that the bond and stock "people" seem to somewhat "agree")

Report this comment
#12) On May 10, 2009 at 11:11 PM, portefeuille (98.86) wrote:

Another sign of fakery – apart from the implausible 'V' shape – is the "dash for trash" in this rally. The mostly heavily shorted stocks are up 70pc: the least shorted are up 21pc. Stocks with bad fundamentals in SocGen's model (Anheuser-Busch, Cairn Energy, Ericsson) are up 60pc: the best are up 30pc.

(from here)

That those "heavily shorted stocks" and "stocks with bad fundamentals" were also "down the most" seems to be somewhat lost on the author ...

Report this comment
#13) On May 10, 2009 at 11:36 PM, ozzfan1317 (69.05) wrote:

I have to agree I am skeptical that this recovery will be very quick. I think as sever as this recession was it is likely growth will be minimal for the next few years. If you invest I strongly suggest doing your homework and only putting your money into strong established companys. Thats where most of my Portfolio is.

Report this comment
#14) On May 10, 2009 at 11:39 PM, ozzfan1317 (69.05) wrote:

Also I would be cautious about a quick recovery but I highly doubt we need to buy extra Ammo and prepare for Americas collapse. However dont invest in a company that may struggle if the economy remains flat for a couple of years just my two cents.

Report this comment
#15) On May 11, 2009 at 12:02 AM, StopLaughing (< 20) wrote:

 A few thought.

1. The market is now acting like a derivative market, mainly because it is now driven by the derivative markets. V bottoms are much more common in those markets. Straight up and down is much more common in  those markets. 

2. Interest rates are low which means that the P/E ratio at the bottom could be much higher than normal. 

3. Many aspects of technical analysis are not acting right. Governments are openly influencing the market so that the news and the timing of the news is not random. 

This market can run in spite of all of the arguments of the bears. However, I have been watching the short interest on my holdings and almost all of the bears are afraid to short at this point. 

A lot of them are talking but they are not shorting. That could change but if it does that could also set up a short squeeze. 

Report this comment
#16) On May 11, 2009 at 9:32 AM, Gemini846 (34.49) wrote:

You know one thing I've decided is that it doesn't matter. Suppose I'm bearish but the street is bullish. I'm either on the sideline, or I'm short term bullish. I can always change to long term bull or reverse to a bear position when the "false rally" ends. In the meantime I don't miss the 40% run up.

Report this comment
#17) On May 11, 2009 at 10:55 AM, portefeuille (98.86) wrote:

more on "CDS rally" (see comments #10,11 above)

Report this comment
#18) On May 11, 2009 at 6:35 PM, ChrisGraley (28.69) wrote:

Today, all my ultra-shorts put me back to almost where I was a couple of days ago. Now I'm hoping to get some gains. I can't even start unwinding any shorts till Thursday, but the picture looks a lot better now.

Report this comment
#19) On May 11, 2009 at 6:45 PM, ChrisGraley (28.69) wrote:

Man! tons of smart people in my blog! Thanks for all the charts and articles and foolish wisdom!

Lots of great stuff in here! 

Report this comment
#20) On May 11, 2009 at 6:58 PM, portefeuille (98.86) wrote:

a nobel laureate for your blog (don't panic, english from 0:36 in the main video ...)

Report this comment
#21) On May 11, 2009 at 10:13 PM, walt373 (99.88) wrote:

Don't buy leveraged ETFs...

Report this comment
#22) On May 13, 2009 at 12:57 AM, ChrisGraley (28.69) wrote:

a nobel laureate for your blog (don't panic, english from 0:36 in the main video ...)

Great post! It's very reassuring when a brilliant mind speaks in easy to understand terms and agrees with your position. I recommend that others to listen to it.

Walt normally I would be the guy making a post like that. I'm usually a pretty conservative bull that prefers to make money with research and hard work. But the fundamentals have changed to the point that they are no longer fundamentals anymore. If you look at the great all-time economic failures in history, they were all due to over manipulation of the market. The top 5 failures combined have not come close to manipulating the market the way the U.S. has in the past year.

Report this comment
#23) On May 13, 2009 at 12:11 PM, goldminingXpert (28.84) wrote:

I regret I only have 1 rec to give this blog.

Report this comment

Featured Broker Partners