Daily Market Reports | Mar 13 2009
By Greg Peel
The Dow rose 239 points or 3.5% while the S&P rose 4.1% and the Nasdaq 4%.
If a sudden sharp rally is Day One, then Day Two usually brings a bit of selling. But if Day Three can produce another rally, history shows that the market has formed the base of an ongoing rally. There are, of course, no guarantees.
Since the bear market began, Wall Street has struggled to put together more than two days of significant rally before the next bad news shock has scuppered enthusiasm once more. The most notable exception was March to May last year. The 50% retracement experienced over that period was fuelled by a majority belief that the credit crisis had ended with the “rescue” of Bear Stearns. The minority, including FNArena, warned that Bear Stearns was more likely to be only the tip of the iceberg rather than the base.
It may be premature to talk about another significant rally, after only three days, but the fact is the majority on Wall Street is expecting one. This time, however, the majority is expecting only a bear market rally whereas last time the majority saw a return to the bull market. What this means is that shorts are likely to be quickly covered if the rally appears sustainable. Sellers are likely to step aside and buyers are likely to re-emerge. In other words, a rally (unimpeded by some new bombshell) would have its own internal combustion engine. But at some point the sellers will return.
On the other hand, if everybody believes something will happen, then the chances are greatly amplified that the opposite will happen. In this case, the opposite would be that a rally from here is not just a bear market rally – a bottom has thus indeed been found.
Your average bear market rally runs 20% (meausured as bottom-up) but can run as far as a 50% retracement from the previous peak (measured as top-down). Since the S&P 500 hit its intraday low last week, the index has rallied 12% already.
The intraday low, incidentally, was 666.
Oooooh.
A bear market will end when the selling is exhausted, and the selling will end when there seems no reason to sell further. There will be no reason to sell further if it appears that nothing new can happen that we weren’t already expecting. The selling will end when the share prices reflect even more bad news than is actually realistic. That has been the theme of this week. Three major announcements were made last night:
The Bank of America CEO chimed in with claims of profitability, thus joining his peers at Citigroup and JP Morgan. While it is appreciated the major banks would not still be standing but for the grace of the American taxpayer, it was also assumed they were still bleeding capital hand over fist.
General Motors declared that it probably would not need the US$2bn added injection it asked for recently after all. Most of Wall Street had assumed GM would simply have to go bankrupt. This week also revelead that GM is now the highest selling marque in China, and that Chinese vehicle sales in February grew by 24% year-on-year.
General Electric was last night downgraded by S&P from AAA to AA plus. Wall Street was expecting AA minus. S&P made the comment that despite the company losing its AAA rating, it was nevertheless “quite stable”.
Banks usually lead the broader market out of a bear market. The S&P 500 has rallied 12%, and the bank index 45%. Given its breadth of business interests, GE is considered a barometer for the US economy. Its shares are up 65%. It was once said that what’s good for GM is good for America. Its shares are up 72%.
The reason those moves are so big is because the relevant share prices fell so low. GM’s jump is only US91c for a stock that traded over US$40 in 2007. GM, GE and the three biggest US banks (by assets not by capitalisation) – Citi, BA and JPM – are all Dow components. While turnarounds in these stocks have been the catalyst for current momentum, they do not have much of an impact on the indices. Note that the 30-stock Dow was up 3.5% last night but the S&P 500 was up 4.1%. These are the standard bearers, but the broad market has followed.
Volume last night was not enormous, which does worry the bulls somewhat. However the volume kick that always comes in the last half an hour was to the buy-side this time, which is encouraging. The S&P reached 750 points which is only two points shy of its technical break-down level.
Another interesting number to look at now is the VIX volatility index. Last night it fell 2% to 41. The following chart shows how significant a fall through 40 might be:
Note that all through the bear market up until the big capitulation of last September, the VIX traded between a range of high-teens to low-thirties. The last big fall from above 30 to below 20 was from March to May last year. Now look at the longer dated chart:
With the exception of the big bull run up to the 2007 credit crisis, and the bull market period between the end of the 1992 recession and the 1998 fall of LTCM, the VIX has fluctuated from just under 20 to just over 40. The VIX is not a leading indicator, it is a coincident indicator. When the market turns the VIX turns too. A high value means a lot of people are buying put option protection becasuse they are scared. A low value means the opposite. Numbers under 20 tend to suggest complacency. And when the numbers fell toward 10 in the aforementioned bull markets, they only fell through 20 once those bull markets were already underway.
So the lesson here is keep an eye on the VIX. If it falls under 20 (or even if it gets close) it is probably time to step aside and wait for the peak of the stock market.
Having been flat all morning, the oil price leapt last night at lunch time on news that OPEC shipments (as opposed to production) had dropped significantly. Oil leapt 11% or US$4.52 to US$46.85/bbl. OPEC meets on Sunday to discuss production quotas, and is believed to be targetting a US$50 oil price at this time. If oil reaches close to US$50 tonight, will OPEC cut?
Gold jumped US$20.40 last night to US$926.70/oz. For gold bugs, this was a sensational result. Gold was a safe haven trade on Tuesday when Wall Street first rallied, and hence investors jumped out of the safe haven on reduced fear. But gold is also the inflation trade, and sufficient fear of inflation has helped gold bounce off support at US$900. A rising oil price helps, but inflation in this case is everywhere a monetary phenomenon.
The base metals’ invitations to the party were lost somewhere across the Atlantic, so while copper and aluminium jumped 1-2% last night, nickel, tin and lead lost 1-3%.
The SPI Overnight jumped 58 points or 1.8%.
On and by the way, it’s Friday the thirteenth.
Oooooh.
