Unearned Rallies
Calling the last three days a “rally” is certainly a fun thing for stock market bulls to claim as their own…as something THEY earned. Maybe if they keep saying it, it will be true. Although I became Less Negative before the “rally”, I look at the last 3 days as a temporary break from the bear market. Of course, listening to CNBC and the other financial media spinmeisters, I have heard that this “rally” has now taken us out of “bear territory” as defined by the silly and useless definition of 20% off the recent index high. Bespoke pointed out how stupid that “illogic” is. Here’s my take - we are not in a bull market and the last three days was a bear market “rally”. Simple as that. Call it a “rally” if that makes you feel better.
But has the rally been earned by the bulls? I’ve written about this before and it is worth repeating it now….
The Fed’s Stock Market 11/28/07
From the middle of July’s market peak until today, go back and review all the gains caused by the Fed and Fed-induced short covering. Be objective. How much of the rally can you attribute to real buying based upon fundamentals? Remember that stuff- the things that supposedly are the basis for stock prices and long term investing? On the other hand, how much of the positive action has been due to surprise Fed intervention like August 17th, Fed commentary like Kohn today, rumors of Fed rate cuts like August 16th, actual Fed rate cuts like September 18th and October 31st? If you subtract out all those 1 or 2% moves, you are left with a massive selloff. Now let’s look at the market reasons that stocks might have declined - poor 3rd quarter earnings, a declining dollar, inflation, the frozen commercial paper market, investment and money center bank writeoffs, a struggling consumer, mortgage defaults, etc. etc. This is the Fed’s stock market - bought and paid for. The bulls and the bears have been doing nothing but selling on the realities of the poor fundamentals and buying whenever the Fed gives them a reason to do so. Are you investing in the Fed or are you investing in stocks?
Remember…I wrote that in November. Since then we have had one rally. A rally that was created by an extreme and illegal (my opinion) act of the US government bailing out Bear Stearns, JPMorgan and the rest of the guys that have largely been guilty of getting us into this credit disaster. By the way, that rally was claimed by crappy technicians or bullish fundamentalists posing as crappy technicians as a bounce of a “double bottom” formation that clearly set THE BOTTOM from which we could clearly say, the “worst is behind us”….”we have priced in all the bad news” and “the market is forecasting a positive economic environment 6 to 9 months from now.”
As that last rally ended in May, I wrote a post called The Next Bottom when the S&P was at 1390.83. Here’s what I said:
The bottom callers announced that the Fed bailout of Bear Stearns marked the end of low stock prices. Supposedly, this unprecedented and illegal (in my opinion) action provided a backstop of epic proportions. As a free market capitalist, this whole episode and especially, the happy and comforted reaction of many market participants has greatly damaged my opinion of this country and capitalism. Nonetheless, it was done. I detest it, but I deal with it.
Here’s the problem….if the only thing that stopped the last market decline was the Fed’s bailout, then what do we do now? After all, the bulls have been mooing for quite a while that the bottom was set and the worst of the credit crisis was behind us. UH OH!! I guess that means that the next decline is not going to be worthy of a Fed bailout. We are on our own this time. Logic right? If there is no new credit crisis on the horizon, then the Fed will not be needed to save us again. As for the economy, the bulls were saying that all was not bad - at least they were saying that last week when stocks were heading higher. So as for renewed rate cut calls, they can try that but it will be pretty pathetic when compared to last week’s optimism.
It’s premature to suggest that the last two days marked a return to continued and meaningful downward pressure, but the bulls better hope so. If we approach prior lows, you can bet that there will be serious attempts at programmed trades to defend 1320 to try and create an inverted head and shoulders pattern and if that doesn’t work, to defend the March 17 support levels. However, the next bottom will be a real test of the bulls beliefs. And this time, it will be without the help of the Fed. Unless of course, there does happen to be a credit crisis moment that has been hiding in the background (maybe in Europe?) that will magically be revealed so the Central Bankers can be justified in their reappearance.
I hope the next bottom is earned by market participants.
So the same crowd that tried to convince everyone that March-May rally was the real deal is now claiming that this week was a rally too. Okay…based upon what? A “backstop” plan presented by Treasury Secretary Paulson and the Bush administration to bail out Fannie and Freddie and begin more formal nationalizing of our financial system. Not to stop there, we had the SEC selectively protect 19 financial institutions against Naked Short Selling. This is the stuff that made this bear market rally happen. When I wrote that post, I was hopeful that the bulls would earn the next bottom and we would not have to rely on Bernanke and Paulson. I was wrong about that. The bulls are freaking pathetic.
So if this week was a rally, I ask you once again …..In the past year, how many times have we had a rally that was not created by Ben Bernanke or some government bailout plan? The answer is ZERO.
How many rallies were earned by fundamentals? How many rallies were earned by long-only bulls buying more stocks than they were selling? ZERO.
Some people, especially the bulls, will tell you that it doesn’t matter why a rally begins. I tell you that it does. Just like most meaningful things in life, it matters whether something is earned. We’ve had a bunch of Unearned Rallies this past year and they have not been sustainable. The past 3 days is no exception.
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