The question I have been asked most in the past 24 hours, is whether the global market rally of the last 2 days is the start of the next global bull market or just another opportunity to sell equities into strength.
The truth is that neither I, nor anyone else can tell for sure in one day. But one day is no trend change. The market was painfully oversold in recent weeks, a bounce was overdue. Markets had sold so far below their longer-term trend that a rally of even 20% would only retest overhead resistance while maintaining their downward channel.
Based on many factors which we follow, my guess is that we have not yet seen the market bottom this cycle. These dramatic up swings are more typical of on-going bear cycles than bulls. In the midst of all the green yesterday, the Lowry’s Selling Pressure Index still finished at our near its record high. That looked like institutions and levered players selling into strength. Upside volume was only 73% of up and down volume combined.
Meanwhile the Bond Confidence Index this week hit a new low of 64.2 as bond buyers continued to move into the highest-grade bonds for safety over yield. I also note that while American markets roared ahead yesterday, this afternoon that rally is already breaking down. When markets cannot rally for even a few days, it is not very inspiring for the bulls.
Anecdotally, I note that there are still a majority of retail, individual investors who seem to be hanging on with their last nerve to their decimated stock and mutual fund portfolios. Frozen by fear, I have not yet seen evidence of their final capitulation selling. And the poor little guys are sadly always the last to leave. Their final cash out will create the ultimate exhaustion low this cycle. Only then can the next cyclical bull truly start.
For those that did not yet sell their stocks and stock mutual funds any time in the last 2 years, I would still consider the recent rally another opportunity to downsize your risk.
And for those that have been talked into levered loans, manoeuvres or margin loans to buy stocks and mutual funds in the past few years, get out of them. Sell into recent strength and pay off your loan. I know that it is a painful lesson learned. But happily if you learn this lesson now, you will never have to make the “credit is money” mistake again in your lifetime.
We truly have no idea how low these markets can go before they finally turn. Let other people be the sacrificial lambs with their own dough. Remember, it’s the second mouse that gets the cheese.
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I enjoy visiting this blog, and agree with your thoughts regarding the bear market we are in. What shocks me though, is how we have these massive rallies,like today on the DOW +400 for absolutely no reason at all. The CNBC talking heads will think of something for an excuse as to why the markets rally. The real reason is never said, and basically, this is a traders market, and 75% of the investors are riding the wave up and down (swing traders). This market is NOT trading on fundamentals. The worst for world economies is yet to come, GM, FORD, CHyrsler and plethoria of other HUGE companies will be going bankrupt, laying off hundreds of thousands of workers. Unemployment will spike to levels not seen on over 70 years. I also would like to add, that, how ironic investment banks in the U.S went bankrupt…..that irony simply does not make sense. After all, don't they pay their analysts millions of dollars do guide thier investmensts.
As long as the US debt continues to increase at 100B per week, I think these swings will continue. Looks like they have given themselves enough until the election. If the markets collapse before that, we may only get a 90% retention rate in the house of “reps”.