I usually am not so sure about things, but the markets are looking very stretched at the moment. Sentiment among bears is of capitulation. Everywhere I go on the blogosphere, I see posts and comments about how the market is rigged by Goldman or repo desks or the PPT, and that trading against robots is a no-win situation. I hear that fundamentals don’t matter, that the bulls are in control, that the transports have confirmed the industrials, that China will drive copper the moon and still buy it all, yada, yada, yada. The upshot is that traders seem to think that the bears will be totally crushed no matter what.
Well, what exactly have the bears experienced during the 50% rally from March 6 to today? I’d say that is about as severe a drubbing as you can take in the market, the polar opposite of what the bulls got last autumn and winter. It is time for a reversal, and not a small one. This is Spring 1930 all over again:
Above chart of the Dow Industrials from Yahoo!
-
Everybody has seen these before, but here are a few quotes from that post-crash reprieve:
December 28, 1929
“Maintenance of a general high level of business in the United States during December was reviewed today by Robert P. Lamont, Secretary of Commerce, as an indication that American industry had reached a point where a break in New York stock prices does not necessarily mean a national depression.” — Associated Press dispatch.
January 1, 1930
RESERVE BANK AREAS FORECAST NEW YEAR
Despite the obvious slackening of the pace of business at the close of the year, leaders in banking and industry throughout the country maintain an optimistic attitude toward the prospects for 1930.
January 13, 1930
“Reports to the Department of Commerce indicate that business is in a satisfactory condition, Secretary Lamont said today.” – News item.
January 21, 1930
“Definite signs that business and industry have turned the corner from the temporary period of emergency that followed deflation of the speculative market were seen today by President Hoover. The President said the reports to the Cabinet showed the tide of employment had changed in the right direction.” – News dispatch from Washington.
January 24, 1930
“Trade recovery now complete President told. Business survey conference reports industry has progressed by own power. No Stimulants Needed! Progress in all lines by the early spring forecast.” – New York Herald Tribune.
March 8, 1930
“President Hoover predicted today that the worst effect of the crash upon unemployment will have been passed during the next sixty days.” – Washington Dispatch.
May 1, 1930
“While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States – that is, prosperity.” – President Hoover
June 29, 1930
“The worst is over without a doubt.” – James J. Davis, Secretary of Labor.
July 6, 1930
‘BUSINESS CYCLE’ SEEN AT NEW PHASE; Bankers Hold Downward Trend in Markets Indicates Recovery Is Near. DENY ANALOGY TO 1920-21 Economists Point to Superior Credit Conditions Now, Holding Easy Money Points to Revival.
August 29, 1930
“American labor may now look to the future with confidence.” – James J. Davis, Secretary of Labor.
September 12, 1930
“We have hit bottom and are on the upswing.” – James J. Davis, Secretary of Labor.
-
The bears were down but not out in June, and quite a few armchair traders jumped in to have another go at the fast money they found when they jumped on board the sell train in October and February. Well, 100 points in about 12 trading days left them flabbergasted, and toasted more than a couple of levered accounts. When traders are flabbergasted, they tend blame manipulation, and concluding the game is rigged, all but the gamblers bow out.
Well, this trader is not flummoxed. I’ll freely admit traded this rally poorly by thinking I should only buy at 620 and then not jumping aboard when we took off on huge breadth and volume from 666, and then by shorting high-flying junk and starting to buy my long term puts too soon, but I can chalk those up as trading school tuition fees. Nothing that has happened this year should surprise anyone these days, when it is so easy to look at 80 years of daily Dow closes on Yahoo. If this is 1988 and not 1930 I will eat the Tom McKans my wife hates so much and take up a respectable profession like welding.
Speaking of 1987 and expectations for a depression, Trader, the cult documentary on Paul Tudor Jones, is finally up on Youtube. People were recently paying $1000 bucks for this thing on VHS. I can’t say that it is worth that kind of dough, but it is definitely worth an hour of your time to watch one of the contemporary greats in his element as he trades what he thinks is the analogue of 1928-29.
UPDATE: Trader is gone. The producer had it taken down. But, it is still out there if you know where to look… a certain renegade financial site has posted a link. I’ll leave it up to readers to figure out which.
Found this tidbit from David Rosenberg’s commentary courtesy of a just-mailed letter by John Mauldin:
“What has led the last leg of this rally has been the most discretionary of the consumer space: casinos/gaming stocks are up 44% from the mid-July lows; the homebuilders are up 30%; the automakers are up 28%; advertisers are up 20%; home furnishings are up 18%; hotel/resorts and specialty retailing stocks are up 15%. It’s only a matter of time before these gains unwind if the early surveys are correct that this may well go down as the weakest back-to-school shopping season on record. It is seriously tough to square the bounce-back in these sectors when you take a look at where consumers are pulling back the most — discretionary spending items.”
The crux of the matter, again from Rosie:
“NOT GIVING CREDIT, EVEN WHEN IT’S DUE
The front page of today’s WSJ also runs with Loans Shrink as Fear Lingers. The largest 15 U.S. banks cut their loan book by 2.8% in Q2 — and more than half of the loan volumes came from mortgage refinancings and credit renewals among small businesses (to show how broadly based the credit shrinkage is, 13 of these banks shrank their balance sheet in the second quarter). New credit creation is practically nonexistent. Capital conservation remains the order of the day. This is one critical reason why it would likely be foolhardy to be expecting a normal inventory cycle to come our way merely because of an arithmetic addition to growth from lower de-stocking in the current quarter. “
Mike, the strenght in this uptred is increddible, I still think that 11K on the Dow, 1200 on S&P and 2300 on the Naz are quite possible … but you need this to create enought energy for the next downturn … people have to become complascent again … I am afraid though that the next time down will be terrible for everyone … bull or bear … as the Govt. will do everything to stop a decline … the volatility will be incredible ..
Agreed. I talked to a couple of friends yesterday who were telling me that they want to cover their shorts and wait for S&P 1050 to short again
This complete lack of any rational thinking and total capitulation might be good news for those who can think straight.
Whoa, Pej, I wouldn’t be so harsh on those who decide to wait for 1050 to short again. They might be right. Be wary of certainty, wherever you find it.
In the final stages of this reprieve, we should expect big divergences to emerge among the following:
US stocks (and the subgroups within)
Foreign stocks
Treasuries
Bonds and credit spreads
Dollar
Oil
Gold and silver
Right now, we’ve got a modest new high in stocks and a modest new low in the dollar, with a fairly complacent corporate bond market. Commodities are off their highs (except copper, which is setting up a great short — look for $1+ fall there). Bonds have not made new lows.
This means that the entirety of the markets are not confirming the same risk appetite seen in stocks. They might catch up, but since stocks are overbought here, I suspect that if they fall in the next week or so, the others will move in sympathy (dollar and treasuries up, the rest down). Even if stocks recover to new highs later this summer, we should then see strong divergences within the stock indeces and across asset classes. This is the same principle that Richard Russell uses in Dow Theory with the Industrials and Transports, but I think it is better since it looks at risk appetite in general, not just as it manifests itself in big cap stocks.
You could see this happening in late 07 when the tech stocks ran away but the rest of the market failed to follow, and when commodities ramped up hard in early 08 as stocks began to slide in earnest. In December, we had extreme deflation signals in treasuries and the dollar, but stocks were rebounding: the asset classes reconciled with a drop in bonds and fall in stocks.
This May, everything was bubbling together and sentiment was extreme. That felt like “wave 3″ of the reflation trade. Wave 5 should be weaker, though of course commodities are prone to spike tops.
Hi Mike,
I am not being harsh, I am just saying that even the bearest bears (they shorted the markets way too early) are now believing that nothing can prevent the market from going another 10-20% higher. I was seeing this as a sign of capitulation, just to confirm your point.
The real 20 bucks question now, is to know what will happen on the $ and long-bond side, once markets start to correct (or dislocate). Last time, there was a major rebound in both this time, it will probably happen again, even though I am still short both and not planning to cover for the time being.
Hi Mike,
How’s your opinion on emerging markets, especially the Asian ones? They’ve been the strongest markets around the world during the bounce from March 6. Some are gaining around 100%+. Some currencies are up by 20% against USD in just 3 months. Rosie is quite bullish about them. Although he seems to believe the statistics coming out of China & others…
Are you expecting a replay of last year? Fundamentally, what are your takes on them?
Just put these markets in a chart with the Eurostoxx 50 and US indexes (and throw in Treasury yields, the CRB index and the dollar) and you’ll see that they are all the same.
What kind of dividends are they paying in China, India and Japan? The whole world left fundamentals behind ages ago.
Long term, I am more bullish on Asia than the west, but I have no special insight there. I just see the same trends as everyone else for China and the US.
I think the divergences will be in the bond market vs. the stock market. The bond traders aren’t going to bid down Treasury yields in the deflationary environment.
Regarding the corporate bond market, does anyone have any data about its partcipants? What percentage of corporate bonds do mutual funds hold?
From Axclr8 (Formerly Annonymous 2):
We are fighting a wave of spending in the form of $2 Trillions of reserves that China is spending. This is pulling the US Market up. I will not bet against this trend. China’s market will implode eventually, but I don’t think it will happen for 1+ year … the Bank of China is guaranteeing all loans out of which 30% are bound to be bad … Best place to be IMO: Commodities & Infra … anytthing the Chinese need … Just like how the ASIAN markets tanked after the US Markets did .. the same will happen in reverse … the US Markets will tank after the ASIAN Markets start to tank … with all these transactions happening in the USD … will it weaken the Dollar? I bet not …. A weak USD is bad for the RMB …. so it is in China’s interest to prop up the USD ….. China to the rescue!
Was watching CNBC from 7 to 9 tonight …. It’s amazing that the bullishness is back!!!!! These guys never learnt their lessons … again, it needs to last to create the biggest BULL Trap ever … I am relishing to see RED on the Tape again … but not for another 6 weeks …
Yes, but the above thesis expressed by Axclr8 (we will crash, but from higher levels), is very prominent among bears. It will be interesting to see how this plays out. Nothing will surprise me except a sustained bull market.
I see that the producer has had the PTJ video pulled from Youtube. I hope everyone got to watch it while it was up!
What I would love to know is how Jones reacted when his depression thesis failed to play out in the aftermath of the ’87 crash. He obviously adapted and pulled through, but how did he change his mind? And what is he thinking now? He wasn’t short last year, though he was only down 5%. Prechter, the other hero of the ’87 crash, was max short from July 07 to Feb 09, reaping 800+ SPX points.
Pej put this on an earlier thread: short interest is way down:
http://www.zerohedge.com/sites/default/files/images/SI%20Plunge.jpg
Put/call is back down too, BTW. A top is likely in. What kind is the question.
Sorry, I did ment to put on this thread, it’s just Safari that doesn’t handle the URL bar as well as Firefox does.
Speaking of emerging markets, the biggest & nastiest of them had a horrific plunge today (5%). It hasn’t done anything to that degree for the last 8 months — nowhere close.
China skeptics (me included) have always believed fundamentally, those Chinese boom in lending is unsustainable and that it’s a matter of time it turns. How big & how horrific… I guess that’s where the sentiment factors come in. In 2007, the major plunge in Chinese markets started in the proximity of US market top in October. China market top on Oct 16, 2007 & S&P500 top on Oct 11, 2007. In a sense, it marked the turning point in crowd sentiments.
One has to wonder… IF the Chinese stock market continues its plunge (today is the interim top), will it mark another turning point for the others (US, developed world in general & rest of EMs)?
And we’ve only talked about China, the topic of Europe is most interesting when the big picture of their banks & the inherent problems in the euro is discussed in depth.
Today, the dollar is gaining strength in earnest, oil is plunging, treasuries are having a nice day. Nigh is the most auspicious turning point in sentiment? (– and consequently in the markets)
“One has to wonder… IF the Chinese stock market continues its plunge (today is the interim top), will it mark another turning point for the others (US, developed world in general & rest of EMs)? ”
Yes. And yes, today is encouraging, but again, if this is the start of a drop, the question remains, what kind of drop?
You can now count 3 major waves since March in equities, bonds, commodities and the dollar. 3 is what you look for in a countertrend move of course. But it is hard to see 3 sub-waves in the 3rd wave. Do we need 2 more, this downdraft being the first of those?
Guys, you have to see this VIDEO:
The Most IMPORTANT Video You’ll Ever See !
Ummm … above video only for the patient! IT’s long …. (8 parts) … sorry everyone.
AXclr8 … funny thing, why did he choose 7% (the most often he mentioned)? Sounds like the Chinese rate of growth or maybe just to make it convenient: 70/7 = 10.
Anyhow, that video implies one thing: Chinese rate of growth is NOT SUSTAINABLE or… it could be a LIE.
Mike said: “today is encouraging, but again, if this is the start of a drop, the question remains, what kind of drop?”
Mike,
First, I don’t find this tiny decline any conclusive. Yesterday saw 1% intraday decline that keeps on rebounding intraday, to finish almost flat or positive, and today is yet again another unconvincing decline.
Second, It’s a bit strong to use the word “encouraging” while we are “hoping” for the end of world to just make some bucks
People are going to suffer in this mess, and those who are going to suffer the most are probably also those who took the less advantage of the previous “boom”.
(note that the words are in quotes)
Today is encouraging from a bear’s eye view because the commodity, bond and currency action confirms the modest move in equities. But then, perhaps this is just a sideways correction prior to a blowoff… who knows.
Please let’s not get preachy. If you think credit bubbles are good, then by all means go work for the Fed and try to revive this one. I for one welcome the Big Flush, since it offers some hope of restoring sanity to a society that’s become more than a little sick in the head. And yes, even shorting is good if it puts some capital in the hands of a few people with a sense of reality.
Remember, the damage was done in the boom (through a misallocation of resources). The bust is just the process of taking an honest accounting and getting back on track. It is an absolutely necessary phase of this project called civilization.
No worries, I agree with you. But collateral dammages are numerous.
And yet again, I don’t see treasuries or stocks declining today. Like during every decline in the past 4-5 months, there’s a major upward move in the last 30min of the day bringing the indices either close to flat or even higher… And as I mentioned yesterday, it looks like a market collapse will push the USD higher…
The 3:30 ramp happens a lot, but if you really look at the data, not as often as it seems.
Would you have any explanation but algo trading or maybe intraday short closing?
Also, I feel like the market is exactly like july-august 2007, when I got massively short and the decline didn’t happen and the dow actually did a new all time high and mass hysteria and irrational exuberance was at the highest levels (and of course, rates were cut and subprime was contained). 2007 saw a minor decline only, and we had to wait until 2008 to get the market readjustment.
So, while I haven’t closed any short position, I feel the pain and know that it might take a lot longer than I think for this bullish hysteria to reverse…
New thread.
The markets seem to be confirming the gut feeling I had yesterday that the declines were not conclusive and actually quite disappointing and showing lots of bullishness still