May 7th, 2008

My "Suckers’ Rally" Scoop’s Bloomberg

Bloomberg came out saying the same thing as you read here first but with more eloquence and with some more authority. I may not carry the same weight as Bloomberg but I beat them to the punch. Bloomberg’s headline was “`Suckers’ Rally’ Signaled by Options After S&P 500 April Surge” and appeared on their website May 5. My posting, entitled “Beware Suckers’ Rally” appeared here April 22. Now I know how reporters for local tabloid feel feel when they scoop CNN or FoxNews to a really big story.

Granted both Bloomberg and StockChartist arrive at the same conclusion but we get there from two different directions. Bloomberg falls back on good old macro-economics and fundamentals – they need to have a good story to tell. They include points such as:

  • “It may be a suckers’ rally. Investors want to believe. But if I’m right, then there’s truth to the argument that this is the worst financial crisis since the end of World War II. The same kind of reflex is the wrong reflex.” said Jean-Marie Eveillard, who runs the $22 billion First Eagle Global Fund.
  • “There are pockets in the marketplace that believe this is a sucker rally, and they’re willing to pay a substantial premium for downside protection,” said Robert Arnott, whose Pasadena, California-based Research Affiliates LLC oversees $26 billion. He said in December 2006 that a bear market was probable.
  • “You’re going to have further losses for the financial system and weakening of demand of employment, of earnings, of profitability that’s going to push further down the stock market,” said Nouriel Roubini, professor of economics and international business at New York University’s Stern School of Business, who more than a year ago predicted a housing slump would drag the U.S. into a recession. This is a temporary, bear-market rally.”

Bloomberg did sprinkle in one or two contrary views but the article concluded with Roubini trying to hit a nail in the coffin by adding there is “complacency among investors thinking that the worst is behind us for credit markets and for financial markets and for the real economy. This is not the year to be in risky assets like equities.”

On what did I base my call of a possible “suckers’ rally”? On my Market Timing Indicator (see previous posts for definition and operation) – the relative positions of the S&P 500 Index and four moving averages based on it. I wrote the following:

It’s getting quite congested in this range and something significant has to happen before momentum either up or down can materialize. The 60-day MA is creeping up to meet the descending 90-day MA and the Index failed for the 4th time to cross over the 1385-1390 level. And we’re about to experience another bout of recidivism as the Index was about to crossed back under the 90-day today.

I’m at a loss as to what to suggest other than to ask you to stay cool and keep your powder (your cash) dry. A clear sign to jump in with both feet (move to 100% invested or more if you’re a true trader and embrace margin) is 3.95% away …. where the Index crosses over the 180-day MA.

If the Index successfully breaks through the upper boundary of this channel at 1385 with some volume conviction, the move to the 180-day MA could be made in several 1.5%+ day moves. But first we’ll have to overcome the hesitation at 1408, the point where the Index bounced and thereby created a support trendline which now might act as another resistance level trendline.

But we’re counting our chickens before they hatch. I’m not predicting, I’m only speculating, playing a “what-if” game so that should it come to pass we have a game plan and we don’t get carried away by all the hype we’re sure to be bombarded with. When it comes to making money, emotions easily can grab us and we throw caution to the wind.

There have been too many cases when situations like this have backfired … and that’s why they’re called suckers’ rallies. I’m willing to give up a couple of percentage points as insurance to make sure that the rally is sustainable and not going to succumb to the overwhelming negative news that’s still out there.

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