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Thursday, January 24, 2013

Rally length

It is obvious when looking at a monthly chart of SPX that the rallies have been getting shorter and shorter.  I thought this was an interesting chart.


Will we break the pattern of shorter length rallies or will history repeat?  This is a very important question at this juncture.  We just passed the next time for a top.  Even though SPX is slightly above last year's high it is still in the area of a possible double top.  I have yet to read or hear anybody mention that.  I have seen some articles about the great rotation from bonds into stocks and that we are now in a new secular bull market.  Even long time bears seem to be saying the market is going higher at least until April or May.  Speaking of bullish sentiment check this out from the latest Bloomberg survey.


This is a poll of international investors that subscribe to the Bloomberg terminal.  They started doing this survey in mid 2009 so this being the most bullish on stocks in 3.5 years goes all the way back to the origin of the poll.

Here is some text from the article.

Behind the enthusiasm for shares: growing confidence in the U.S. economy and ebbing concerns about Europe. America is in its best shape in two years, according to the poll, with a majority of the 921 surveyed on Jan. 17 describing the economy as improving. In a sign the euro-area’s three-year debt crisis is easing, only 45 percent said the region’s economy is still deteriorating, down from seven in 10 two months ago. 

 I wonder what exactly they are looking at.  Is the U.S. getting better?  The manufacturing data clearly is not.  That is the best real time and least revised data we have for judging the strength of the economy.  Here is a chart of the Macro economic surprise index.


According to the article, it went negative with the recent data.  Clearly the last few weeks has seen data that has been worse then expected.  I noticed there are some instances of the index going negative that are not marked with red arrows because the market did not sell off significantly.  However, there are also some highs in relative proximity to negative cross overs. 

I can say with absolute certainty that the economic data does not back up the contention that the U.S. is the best it has been in the last two years.  It is clearly in the worst shape since the last recession.  I am also sure that the extra 2% being taken out of paychecks this year will have some negative impact.  What are these people smoking? Seriously, I would really like to have some of it.  Whether one believes we are in a recession or not, we are clearly weak and not strengthening yet.  I also expect there will be spending cuts to come.  They moved the ones that were signed into law out two months.  They did not stop them.  To date there has been no discussion about stopping them.  I think the real deal at year end was to spread everything out and give the people the bad medicine in little doses instead of all at once to reduce panic in the market.  It worked so far, but how long will that last if the spending cuts become real.
What about Europe?  Is Europe getting better?  This is from a recent IMF statement.

An unexpectedly stubborn euro zone recession and weakness in Japan will weigh on global economic growth this year before a rebound in 2014 that should deliver the fastest expansion since 2010, the International Monetary Fund said on Wednesday.

Europe is in an unexpectedly stubborn recession huh.  I wonder why that is so unexpected.  There is a lot of tax hikes and austerity measures in countries with very high debt levels.  It seems like a weak economy should be expected.  Here is the latest Eurozone PMI chart.


The PMI is still in contraction mode.  It is clearly weak to start the year.  Will it improve or not?  I would say it is impossible to say from this chart.  There certainly has not been a positive crossover yet.

Lets see what Dr. Copper has to say (JJC copper ETF).  That is supposed to be a good indicator of the global economy.

The green arrow is what happened last Jan. The red arrow is what has happened so far this Jan.  JJC is still below its high from last Sept. and found its high this month on the first trading day.  It does not seem to be as enthusiastic as stocks are.  Will it turn up or down from here?  I don't know, but there is definitely no clear sign the global economy is set to pick up.

It seems to me there is a lot of enthusiasm about the economy and prospects for stocks that does not seem to be warranted by the current economic data.  Is this a case of the market leading a turn around in the economy or the last gasp of a bull market?  I guess we will see.



teclontz said...


Your skepticism of the "moving out of bonds new secular bull" for good reason.

I have another to add: in my own study of secular bull and bear reversals, the pattern seems to be that a secular bull has bonds and stocks out performing gold.

A secular bear has two parts. The first half has gold and bonds outperforming stocks, and the second half has gold and stocks outperforming bonds.

All that would be indicated by a move out of bonds is the second HALF of a secular BEAR, rather than a secular bull.


Traderbob58 said...

I think it is going to be different this time then it was in the 70s. We had horrendous inflation in the latter half of that secular bear market that caused the rally in gold and sell off in bonds. I believe we are in for deflation this time which should have a different result.



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