With the markets having been on a tear since the S$P 500 made a new 12-year low on March 9, the question remains whether this move up is the beginning of a new major trend or simple another bear market hiccup.
Dr. Housing Bubble featured the table on the left showing the magnitude of bear market rallies during the Great Depression. He elaborated as follows:
Some people think that stock market rallies only happen in full on bull markets. That is not the case. In fact, some of the fiercest short term jumps happen when the economy is in utter disarray.
From November of 1929 to September of 1932, the Dow saw 5 rallies over 20+%. One hit 72% and one hit 48%! In fact, the 72 percent rally happened right after the market hit the abyss. Yet as we all know, the Great Depression caused fundamental problems in the economy that lasted the entire 1930s. So only looking at the stock market as an indicator is problematic. And keep in mind the rally occurred right on the heels of thousands of bank failures in the 1930s and unemployment spiking to 25%.
We also have the problem of interpreting math results. For example, everyone was cheering the 40 percent rise of Citigroup this week but forgot to mention that this amounted to 40 cents. You gained 1 quarter, 1 dime, and 1 nickel for each share you owned. The rally we are currently seeing is strictly a technical rally. Don’t fool yourself into thinking otherwise. It is the same as the Great Depression bear market rallies. We will test lows again soon. Maybe once those stress tests are released or when the 1st quarter results are announced starting in April of 2009. For the mean time, enjoy the bear market rally.
The investment community has always been and still is fascinated with trying to pick a bottom, and then ride the gravy train all the way to the top whether it is a bear market rally or not. Of course, getting in at the bottom is nothing but sheer luck as is selling at the exact top.
If you are a buy and hold victim, you are pretty desperate in trying to make up huge losses as fast as you can, which usually leads to bad decisions and even more losses. There is nothing wrong for an aggressive investor to take a chance and jump in early. However, without acknowledgement that an incorrect decision could have been made as well as a plan in place to get out again, before major portfolio damage occurs, is something that most ignore.
The above table shows that bear market rallies can be incredibly powerful and long in duration. They may even generate a buy signal for our domestic Trend Tracking Index (TTI) and get us back in an invested position. Since you can never be sure about the duration of an uptrend, especially given current economic times and circumstances, it is imperative that you have a clear plan in place as to how to deal with market adversity the moment you establish new investment positions.
Neglecting to do so will enhance your odds of seeing your portfolio getting pummeled when the rally runs out of steam, the bear resumes its trend and new lows are being made. These treacherous times are far from being over and if you decide to engage some outside help for portfolio management, be sure to ask the most important question: “What is your exit strategy?”
Comments 1
I’m not an economist, but this rally seems like a bear market rally, rather than the market turning around and becoming bullish for a longer term. People are grasping at straws, for positive signs, such as increases in existing home sales last Quarter, which were slightly larger than expected; they were still poor, in the big picture of things. To me, the key indicator is the joblessness rate; it’s too high. People can’t pay for essentials, much less anything else, if they’re unemployed. Also, there are so many other economic indicators, which are bad. Obama and Bernanke, both, keep saying that the economy is fragile. I think that’s an understatement; I think the economy is in really, really bad shape.
Also, when the bankers sat down with the president, yesterday, that was a “let’s all look good” meeting. Nobody wants to come out of that meeting looking bad. Watch what politicians and big bankers do, rather than what they say. I commend you to read the funny story, in Ulli’s second blog, titled “TARP to GARP” about Heidi’s bar. It’s a very humorous way of explaining the banking mess.
Also, “the rubber will meet the road,” when the banks and the potential buyers of the banks’ toxic assets (gotta love that misnomer – something’s poison but it’s an asset???) get together and decide what they’re going to sell at a price. The government wants the banks to sell their best real estate, at a low price, but the banks don’t want to sell their best and keep their “dogs”; if they do that then the banks will still have their most toxic assets on their books. Also, the banks want to get the best price they can, for the real estate they sell to the potential buyers of this real estate. Do we really think this is going to work?
“Investors Business Daily,” this week, also write that their are somewhere between 700,000 to 800,000 real estate properties, which the banks hold that are “shadow” toxic assets and were not included in the count of toxic assets. Where does this mess end?
Do we really believe that the buyers of these toxic assets are going to buy them “sight unseen?” I don’t I think the potential buyers are going to have teams of appraisers go out and physically appraise each property, although the government says this process is supposed to be completed in a few weeks. I don’t see how it can happen so fast.
So, what is goint to happen in the meantime? Are the banks going to make a whole lot more loans without knowing if they can sell their toxic assets at the prices the banks want? Let’s remember, the banks care about themselves, first, and they will take care of themselves first — that’s one of the biggest reasons we’re where we are with the big banks. That’s why some of them want to give back TARP, now. They want to get back to business as usual — no government restraint and doing what they want with their money without the government peering over every move they make. But, of course, if they’re really in trouble, they’ll fall back on Bernanke’s promise not to let them fail. What great deals!
I believe it’s many people nature to look for others or systems to “rescue” them, when things are bad. I think, right now, people are looking for cooperation between the banks and the government to rescue the financial mess: Bernanke and the Federal Reserve: FDIC; and Geithner , who does not seem very bright to me, much less honest, and whose comments to Congressional committees often seem counter to what Bernanke has and is telling Congressional committees. I don’t put much in what these institutions are going to do to “rescue” this economy. Bernanke gave a lot of people a warm, fuzzy feeling of confidence with his “60 Minutes” interview, but I think he’s done about all he can and maybe done too much by saying that he is not going going to allow any big bank to fail. If I were a big bank’s CEO, when I heard this, I would have been dancing in the street. I just don’t think these people or these institutions are going to “rescue” the economic system, as much as we would like a “rescuer.”
Then, we have the much balleyhooed stress tests the government is doing is to find out how much more money the banks need. Wow! Another great deal. You make bad loans and get yourself in trouble, the government bails you out on the bad loans, then it will give you as much money as you need to keep you in business. I’m starting to wonder if we’re doing this in upside down. Maybe we should be bailing out people like Heidi, instead of the big banks. Or maybe we shouldn’t bail out anybody, as this is getting pretty expensive and the FDIC is going to have to keep the printing presses running to the max 24/7 to pay for all of this with inflated money.
I guess where I am, this week is, fool me once, shame on you; fool me twice, shame on me. We’re just about to get fooled at least twice, actually three or four times — and this is supposed to solve the financial sector’s problems. and help the country???