Thursday, April 9, 2009

Technicals: Where Is The Pullback? What Pullback?

After a 25% rally in the past 40 days, is the market set to undo its 45% loss from the S&P500 all time highs? Many bulls are now claiming that now all is back to normal, and that despite the loss of the securitization product, the government will be happy to releverage consumers and companies to historic credit levels following the bail out mantra "take out debt now, spend tomorrow, save... oh, at some point." In the meantime the question of whether the slow down in the macro economic collapse is an indication of a recovery or just, as David Rosenberg states, a "slowing down in the collapse." Regardless, the market's greed and optimism seem to be back, ignoring all bad news (WMT up on a big miss in comp store sales, BRK downgrade) and rushing higher on anything remotely perceived as good.

So while the fundamentals (or at least the positive side thereof) point higher, what do technicals imply?

Thomas Lee of JP Morgan is skeptical that the exuberant rally is sustainable, purely on empirical technical data. From JP Morgan:

What happens after a 20%-plus rally (3/6 to 4/3)? Since 1900, a 7% pullback, implying an S&P 500 of 780 or so . . . . The question on our mind (and many investors’) is whether this rally is a Bear trap or the start of a Bull. For either camp (bull or bear), a market correction/ pullback would be helpful, allowing short sellers to cover and providing an entry point for real money buyers. But this market has been frustrating, as equities have shown an “underlying bid” and not provided the correction/pullback many are seeking.

We believe an 8%-10% pullback will be seen in coming weeks and supported by the historical pattern following a 20%-plus gain (in 40 days or less). Since 1900, the Dow (as a proxy for equities) has risen 20% or more within 2 months, 24 times. In the month following this gain, the Index has on average fallen 7% from a peak (see Figure 3). Using the S&P 500 recent closing high of 842 implies 783.

We still see a Final Low in the 750-775 range in the coming months . . . . We believe the data support our notion that US equities are in “proximity to the bottom.” Our view is based on the notion that risk appetite naturally improves as the economy recovers, which implicitly assumes the US economy troughs midyear with a return to growth in 2H, consistent with J.P. Morgan Economics. It is also supported by the idea that breaching a 12-year low in the S&P 500 in early March signaled we were at an important juncture in this Bear. In our idealized view, we believe a final low is ahead of us in the coming months, with an S&P 500 close in the 750-775 range as the signal for us to make a big move into equities. In other words, absent incrementally negative news, a close in the 750-775 range is probably the level we see this Bear market ending.

Another interesting data point presented by JPM is the shift in sector leaders year to date: on an extended basis Technology and telecom have been by far the best performers for the year (the NASDAQ is now solidly in positive YTD territory on expectations that it will be the first sector to recover, tech earnings next week will be interesting), while over the past month, the leadership has been concentrated in the most shorted sectors: financials and discretionary, leading one to argue yet again that the major move in March has been forced by the covering action after the S&P failed to break the 666 low.

So as Wells preannounces and takes the market ever higher in the context of accelerating California home foreclosures, increasing credit card rates and delinquencies, record unemployment, tight consumer credit, mortgage rates that had fallen and are since almost back to levels pre the QE announcement, a 80% increase in S&P earnings back to 70 in 2009 and collapsing trade flows (but, come on, these are all lagging indicators), the market continues its exercises in anticipating where the next good news will come from in market in which the bulk of companies have now pulled all guidance, and are praying to have some good preannouncements to push their stocks higher by 50% in one day. Sphere: Related Content
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Anonymous said...

c'mon ZH you've been ignoring the "green shoots"? didnt you read the fed minutes yesterday...everything is back to normal

Fred said...

WFC revenues and earnings are unsustainable due to one-time nature of the mortgage refi's. CFO was on CNBC, and was pathetic. Refused to answer any questions regarding how come they are not looking to repay TARP if their earnings are really so strong? WFC has been one of the most manipulative of the banks regarding its earnings, dividend, need for capital, etc. Be on lookout for Whitney to bash the quality of these numbers and drive banks prices back down a bit. Q2 will not have these big refi revenues....

Anonymous said...

WMT is down 4.7% right now kid!!

Anonymous said...

Cold hearted orb that rules the night
Removes the colours from our sight
Red is gray and yellow, white
But we decide which is right
And which is an illusion

Pinprick holes in a colourless sky
Let insipid figures of light pass by
The mighty light of ten thousand suns
Challenges infinity and is soon gone
Night time, to some a brief interlude
To others the fear of solitude

Brave Helios, wake up your steeds
Bring the warmth the countryside needs

Anonymous said...

Yeah, what's the big deal if we aren't actually manufacturing or creating anything (besides creative accounting in order to position yourself to make the most of the next bailout) and people are kicked out of their homes, which are then left to be looted and vandalized. As long as the stock markets up, all's good, right? And I mean, the government is telling us to buy stocks, that's good news. I think their strategy, and I've heard this has worked well before, is something like this: if we all buy stocks, they go up! Win win baby!

eh said...

A return to growth in the second half?? Like an article I read the other day asked: Where will the jobs come from?

Anonymous said...

This is the financial equivalent to a Michael Jordan head fake.

Anonymous said...

Tyler you are now saying that 666 was the "final low" and we are in a new bull market?

I don't get it. . .

Tyler Durden said...

i have not said anywhere that 666 is a final low, nor that we are in a bull market.

Anonymous said...

My bust Tyler, you were quoting Thomas Lee.