Thursday, June 15, 2006
Market Produces a 300-point Bear Market Rally
The market has put together two big point-gainers in a row after the bear market had smacked it hard. Undoubtedly, this is short-covering buying and should burn itself out very quickly. Coincidentally (not!), it occured in the two days leading up to options expiration and just happened to send the QQQQ index options sailing right into their landing slots at Maximum Pain (39). And, the OEX index options also were right above their landing slot at Maximum Pain (570) as well. Almost every month the market makers in options are able to land their vehicles right on the price point which produces maximum pain (i.e., maximum losses) for buyers of both puts and calls. This month proved to be one of those months, despite one of the largest selloffs going into expiration week that we've seen in a long time.
While it would be nice to say that the big rally was caused by buyers jumping into stocks at bargain prices, the reality is that the bear market/correction has a lot longer to run than this. Anyone buying for the long haul is going to have to simply recognize that the gains are going to be given back in the next few months. Of course, that may be their strategy -- to buy the dips. That's a fine strategy if you're investing periodically for the very long haul. But, very few investors actually do invest for the long haul, unfortunately, and it won't be long before they are going to see losses and will be sellers again.
TrimTabs reported late Thursday that investors had pulled $6.4 Billion from stock funds in the last week. That comes on the heels of a net outflow of $1.87 Billion the week before. Clearly, the public is not a "buy the dips" crowd! They were even selling bond funds, for that matter. Apparently, they were intent on preserving wealth the old-fashioned way.
Terry Laundry, who developed the technical analysis technique known as T-Theory and built a large investment fortune using it, updated his blog on Thursday. He makes some interesting points, such as the fact that the Interest Rate T's, which tend to terminate at stock market bottoms, have been pressuring the stock market. The volume oscillators have been trying valiantly to indicate new uptrends in stock prices starting in recent weeks, only to see those nascent trends get hammered by the bear market. As soon as those Rate T's bottom, stocks are going to have a much easier time developing uptrends. He's estimating the first Rate-T will terminate in early August. The stock market could get a lift from that pressure easing, but the second Rate-T is scheduled to terminate in early November and may keep the stock market under the same kind of pressure we've been seeing lately. This forecast would allow for a brief Summer Rally (a Winter Rally in the Southern Hemisphere, presumably), but gains in that rally would likely be given back in the fourth quarter of the year.
We have a slightly different take on the termination of the first Interest Rate T, in fact, and have the stock market bottoming much earlier than August. Thus, we think that Summer Rally could get started quite a bit earlier than Terry does.
As we have said several times before, the picture is setting up to be a cousin to the market of 1994, which saw a sharp correction into a mid-year low, a rally that just retests the old highs, then a plunge into the last few months of the year. That last plunge landed a bottom that launched the largest bull market of the Twentieth Century from 1995-2000. Remember, the longer the base, the larger the rally that follows on its heels. Given a base that appears to be the entirety of the rest of 2006, investors are going to have to either take a very long term perspective, or trade this market. While some bulls were shocked by the ferocity of the recent decline, the bears must be absolutely shell-shocked by the ferocity of this latest bear market rally. Normally, the market will plunge faster than it rallies. In the present market, the rallies have been mirror images of the plunges. Never fear, though, the bears will have their turn again very shortly.
Note that if this were a bull market rally, it would have moved up gradually, backing and filling and not developing any short term excesses that could send the market down in a big hurry on profit-taking. It would not shoot out of a cannon like this one has. Over 300 points gained in 1½ trading days is definitely not a bull market rally -- it's a short-covering exercise for the bears as they are forced to take profits by becoming buyers of stocks. And, what goes up in a big hurry will often come down again in a big hurry as short term traders lock in profits by selling and the bears get even by selling the market at higher prices.
http://marketclues.blogspot.com/
.............Spaf
