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Sunday, 19 April 2009

Is This Rally for Real?

by Mick Weinstein

The S&P 500's rapid 26 percent rise since its March 9 low has investors wondering if stocks have put in a meaningful bottom. Has the time come to put new money to work in equities, or is this a mere bear market rally that will unwind shortly as indexes plumb new lows? Both cases rely on speculation regarding the macroeconomic picture, as traditionally the stock market has served as a leading indicator of broader economic recovery -- an indicator, that is, which one can only really observe in retrospect. Ben Bernanke, for one, sees "green shoots" of recovery sprouting up.

Here's one helpful starting place on the matter: a comparison chart of 4 Bad Bear Markets that DShort updates daily. Or in another (more humorous) framework, are we in Stage 13 or Stage 15 of this investor psychology chart? Econobloggers weigh in on both sides:

The 'This Rally's Got Legs' Camp

• Portfolio manager J.D. Steinhilber says this move should have staying power. Steinhilber cites "the sheer magnitude of the bear market declines in broad stock indexes (60%!) over the past 18 months" and believes "[t]he immensity of the government's stimulus efforts, both fiscal and monetary, which now total a mind-boggling $4 trillion, appear to be taking hold in the economy and markets." Steinhilber finds foreign stocks to be particularly attractive here.

• Doug Kass made a bold and timely market bottom call in March ("perhaps even a generational low") and remains bullish, but now names some "nontraditional headwinds" to be wary of.

• Both Scott Grannis and Bill Luby see a bullish sign in volatility falling back significantly of late. And Grannis notes that industrial metal prices have bounced: "Maybe it's the return of the speculators, but even if it is, it reflects a return of animal spirits and suggests that monetary policy is easy enough for people to start releveraging."

• Hedge fund manager Dennis Gartman also uses industrial metals as a leading indicator, and as Market Folly notes, Gartman uses the Baltic Dry Index and the Transports as signs we're exiting recession. In response to these all moving upward recently, Gartman "wants to be long copper and Alcoa, and short the Yen," as the Japanese are big importers of commodities.

• Octagon Capital technical analyst Leon Tuey sees extreme pessimism in the current CBOE put/call ratio and that, pushed along with massive new liquidity from the Fed, are signs "we are not witnessing a bear market rally, but a bull market, the magnitude and duration of which will surprise everyone."

• Jeff Miller of NewArc Investments sees a lot of skepticism about any positive economic signs. But Miller uses a remarkable sportsman's model to suggest we really may be moving upwards.

The 'Sucker Rally, Don't Buy It' Camp

• Tim Iacono has his eye on unemployment data: "Conventional wisdom over the last fifty years or so is that, during recessions, stocks make a bottom at around the same time that monthly job losses peak... If past is precedent and if the recent January decline in nonfarm payrolls of 741,000 turns out to be the peak for this cycle, then it is reasonable to believe that the March low in equity markets could be a lasting bottom. However, if either of those are untrue -- that this downturn will be different than previous recessions or that job losses have not yet reached their peak -- then we are more likely to see new lows sometime later this year. In my view, that is the most likely scenario."

• Tyler Durden believes quant funds drove up the market in March, in a "distortion rally" that lacked broad-based support: "Risk managers allocating capital to quants are prolonging and exacerbating the long-term bear markets in equities, creating an atmosphere of distrust and making markets unreliable tools of price discovery and playgrounds for rampant, Atlantic City-like speculation. In the words of both a NYSE chairman and a famous credit index trader, 'This will all end in tears.'"

• Peter Cooper says "the absurdness of this sucker's rally ought to be obvious to all... Unemployment is still rising, house prices are still falling, and the fundamentals of bank balance sheets are still deteriorating."

• Likewise, Henry Blodget finds the "'suckers' rally' argument far more persuasive than the 'new bull market' one...About the best we can say is that, after 15+ years of overvaluation, stocks are finally priced to produce average returns over the next decade (9%-10% a year or so)."

• Investor Sajal has a nice roundup of how various market gurus (Marc Faber, George Soros, Jim Rogers, and more) see things here. Most believe that we're in for further downside, and that this rally is not to be trusted.

• Finally, James Picerno says the trend may now be our friend, but still: "Even if the recession has bottomed out, that's a long way from saying that a return to growth is imminent. It's likely that the economy will tread water for several quarters at the least once the economy stops contracting. And while the stock market appears inexpensive, or at least fairly priced, it's still too early to expect that profits are set to rebound any time soon."
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