Friday's +3% "up-day" was a bad signs for the market | RED FLAGS EVERYWHERE
January 05, 2009
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RELATED TICKERS: SPY
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This is a follow-up to my prior 5 posts regarding +3% point rallies like the one Friday. Unless a 3% rally (300 point up day on the DOW) occurrs at "a bottom" it is bad news during a bear market.
If you've shorted stocks after each of the last 3% "up days" and my posts then you've made money very shortly afterwords.
Violent moves upward are one of the few dependable signs that you are in the midsts of a bear market and not a new bull market. So heed them.
BEFORE YOU GET GIDDY AND BUY STOCKS REMEMBER THIS:
In 1930 the market had fallen 60% from it's 1929 highs. From the end of 1930 thru January 1931 the market rallied 30%. It then fell another 66% from 1931 - 1932.
There were two +25% rallies in 1931 (39% and 27% respectively) but the overall trend was down.
The moral of the story is:
1. No market falls or rises in a straight line and bear markets can be especially volatile in both directions. Big rallies and the "fear of being left behind" are generally harbingers of bad things to come.
2. The trend is still down. We have yet to set higher highs on any of the global markets and I'll refrain from being bullish until we can.
REPOST OF THE FACTS:
Here is a historical fact... There were 16 (up) +300 point days for the DOW in the 2000 to 2003 bear market. There were no 300 point days from 2003-2007 bull market. ZERO..... The first firm to make note of this (as far as I can tell) was a study by Lowry’s Reports.
They discovered that during the 2000-2003 bear market, there were sixteen three hundred-point up days in the DJIA. Despite these big surges, the market continued to make lower lows.That began in March 2000, and ended 3 years later in March 2003.
By contrast, this volatility was not present during the bull run from March 2003- October 2007. There were no three hundred-point up days during that entire period.
UPDATE:
I have been shocked by how far this market rallied on light volume at the end of the year... but I did see a rally coming and (this may surprise many of you) I was long the 2x Russell 2000 ETF (UWM) for a trade through 12/31. Personally I thought an end of the year mark-up was a HIGH PROBABILITY. But I'd be lying if I told you I thought we'd rally this far. I didn't think we would hit 930 because that is the extreme high end of my our trend of lower highs for the market.
Reasons I will short some more if the market stays at this level tomorrow :
1. On Friday 1/2/2009 we had another 3% "up day
2. Technically the market is overbought on many ocillators - it is at levels we've only seen twice in the past 3 years and above levels that have preceded major sell-offs several times in the last 15 months.
3. We rallied on EXTREMELY low volume which means there isn't much support for the market if it were to fall and that the rally didn't pull many people off the sidelines.
4. Most of the "good stocks" I like with stable income prospects no longer appear cheap to me given their valuation and the risk of 2009 earnings being below my expectations.
5. 930 is a major level for this market a significant break above 930 would represent a higher high and be very bullish. We failed to breach and hold that level today.
We are also very overbought on most major
Additionally those of you who are touting this rally as the new bull market probably need to be reminded that there were 4 +20% rallies from 1929 to 1932 as the market lost 80% of it's value.
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On a Fundamental Level - You just have to be short here
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Why is this market cheap here at 15x next year's earnings... yeah we're 15x Goldman Sachs expected earnings for the S&P 500 ($56).
15 x $56 = 840 for the S&P 500 ... we're about 30 poitns above that)
Normalized earnings for the S&P 500 are probably $65 - $75 without a bunch of leverage.
15 x $65 = 975 - we're only about 53 points below that.
SO ASK YOURSELF... ARE YOU FEELING LUCKY... WELL ARE YA?
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MY FAVORITE REAL LIFE TRADES
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My favorite active real ife shorts
RYL - Ryland Homes
CHRW - Trucking logistics firm trading at 27x earnings, overbought and over-priced vs. peers
TM Toyota
TSO - Tesoro Refinery (one of the most overbought stocks I can find & I hate high cost refiners).
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