As of last weekend, I wasn't expecting the rally to push much higher in order for the major indices to make a final set of new lows. They did, so I must adapt and therefore adopt a more bullish stance. However, I would note that trading from the long side in a major bear market is always risky. Surprises come to the downside.
I would also note that the minimum condition for a major bear market rally has already been reached (20% from bottom to top). So there is still the risk that it is already over. I will be watching fibonacci retracement levels (750, 734, 718) for signs of a potential upside reversal. But remember that these numbers don't really mean anything on their own. They need to be used in conjunction with something else in order to be considered useful - like any technical analysis tool. Unless I saw a number of indicators showing strength at these levels, I doubt I would venture into the long side. I'd rather risk missing the multi-month rally altogether. Then again, any idea can be a good one if your risk is defined.
Looking at a weekly chart, we see that even this rally wasn't enough to tag the 20wk EMA.
But the main reason I remain so hesitant about this rally is the position of my oft-cited indicators. They are both screaming overbought at levels as extreme or more so than levels commensurate with other major bear market rally peaks. Additionally, the VIX remains stubbornly high.
As I've mentioned over the last few weeks, the dichotomy between the various indicators of sentiment has never been more confusing. I've read many notes from other analysts noting the broad participation of this rally specifically (the others were more or less short covering rallies in financials). They've also noted the many exhaustion signals that correspond with the ends of other major bear markets (like being down 8 of 9 weeks straight).
But then I look at P/E multiples from outer space and dividends being cut everywhere and wonder to myself how anyone would possibly consider buying stocks right now. 1 year trailing earnings (reported) are at 51.2. No, I did not type that dyslexically. Fifty-one point two. The S&P 500 returned a total of $15 in 2008. Even the fantasy-land "operating earnings" are collapsing. 1 year trailing clocks in at about 15.6. See for yourself here.
Even if one thought this was the bottom, why wouldn't they just buy the corporate debt, which yields far more than common equity and is trading at a discount to NAV itself? I cannot think of a good enough reason to buy a basket of stocks now with the intention of holding them. Other than blind optimism, that is.
I also see societal acrimony getting even nastier. This article from Rolling Stone (hat tip reader Fish) shows how the outrage is going mainstream. Slipping a little profanity into a profane situation will probably shake a few from their nihilism. This is a fantastic read, by the way. I've just started to hear rumblings that the second batch of TARP money has been handed out and congress will soon be asked yet again to cough up. When does this spineless bunch finally put their foots down? It could be a long, hot summer...
The Euro looks like it has reached a climax and should head back down to make new lows. A stop could be set above Thursday's high.
That's all for now.
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