JUST HOW BIG HAS THE RALLY BEEN?
The rally has felt surreal in its quickness and ferocity, but in historical terms this has been a fairly mild move. The following comes to us courtesy of Chart of the Day:
The Dow made another rally high Thursday. To provide some perspective to the current Dow rally that began back in March, all major market rallies of the last 110 years are plotted on today’s chart. Each dot represents a major stock market rally as measured by the Dow. As today’s chart illustrates, the Dow has begun a major rally 27 times over the past 110 years which equates to an average of one rally every four years. Also, most major rallies (73%) resulted in a gain of between 30% and 150% and lasted between 200 and 800 trading days — highlighted in today’s chart with a light blue shaded box. As it stands right now, the current Dow rally (hollow blue dot labeled you are here) has entered the low range of a “typical” rally and would currently be classified as both short in duration and below average in magnitude.
Source: Chart of the Day
I think you should scale the rallies by 1/[lowest Fed Funds rate]. If you do this you should realize how scary it will be if we double dip or when the next bubble comes. For 20, years the Fed’s penicillan has been less and less effective, those Wall St. viruses have become very adaptive, while the main street and cute brontosaurus’s are long gone (tis a lesson in being just cute, friendly and blissfully happily eating swamp grasses).
TPC, I wouldn’t call a top here, but I think your thesis of “earnings better than expected” = higher stock prices may be weakening. Sentiment slowly seems to be shifting. People know earnings are OK, but the economy is very sick. As of this minute (12.45 Fri) we’ve erased 100% of the YTD gain on the SPX (the afternoon will bring a rally but it won’t be convincing), excluding that first hour of the New Year’s joke.
The China story isn’t supporting the market anymore either. How could it. This country has rigged its economy in all sorts of short-term ways, e.g., increased its money supply by 30% in 1 year and insisted on banks leaning up a storm (the economic theory supporting this is a complete zero). Good for speculators and housing (the same difference).
More than anything, all the financial blogs are calling BS on the pumping of the SPY and in particular the overnight futures manipulation. I mean EVERY blog I read (dozens) analyzes it. Whoever is doing that is now thoroughly compromised — not that it doesn’t work now and then, but that the game is up, so the large hedgies will take the other side of it.
It’s become an ETF market, the opposite of what it was during the crash, where individual companies crashed at different times. This has distorted pricing of underlying stocks badly, especially the high volume ETFs (EEM, for example). Finally people are talking about this too. Is EEM overvalued? Who the hell knows. But the underlying companies are WAY overvalued. Somehow this math isn’t clear to the funds with massive amounts of volume, but it will be soon.
My view is that market trades between 1000 and 1200 for what will seem like FOREVER. Until people realize that stocks really aren’t that great of a place to stick your money unless you really know how to trade and you have a VERY open mind about the future (good or bad). Disclosure: I short every rally and buy every dip, until I see policy has changed.
I don’t see that much has changed. JPM and INTC’s earnings were pretty solid. The Fed remains accommodative. The stimulus is chugging along. Nothing on the macro sense has changed which means the risks remain to the upside here. Could we go thru a 5% correction? Sure, but I don’t see a dramatic and sustainable downturn developing here.
And the market is still up 1.8% YTD despite today’s hiccup.
If the rally ends up being average, then the S&P500 gets to about 1340 in another 16 to 17 months and then the rally ends. That would be another 17% gain versus yesterday’s close and would be a doubling off the March bottom.
The chart also shows the rally to be just a bit ahead of itself for its current duration. A rally that fell right on average would be at about 50% now or S&P 500 at 1000 or so.
That seems to fit with the general consensus and even fits with David Rosenberg’s piece the other day that put the S&P500 between a low of 840 and a high of 1350, where David estimates fair value to be 890 based on Tobin Q replacement cost and the final phase of the rally that typically comes to a level of about 50% overvaluation.
does this chart differentiate between a ‘rally’ before significant correction and a bull move?