Guest Post: Bear Market Bounce OR New Bull Market

Tyler Durden's picture

Submitted by Lance Roberts of Streettalk Advisors

Market Bounce OR New Bull Market

sta_risk_ratio_083011The question that I have been asked more today than almost any other time in the past month has been "Is This The Time To Start Buying Back In?".  With the recent rally off of very oversold conditions in July and August, a reflex rally has been in the offing.   Also, with this being the end of the month, we are seeing portfolio window dressing for mutual funds.

However, a brief review of our technical indicators is in order to determine where we are in this current market environment and what the potential "risk" versus "reward" of being fully invested currently is. 

Back on April 25th of this year we stated that: "Our proprietary risk metric is beginning to throw off a warning signal which comes just as the markets are about to enter their seasonally weakest 6 months of the year.    The risk ratio indicator is a weighted average for bullish to bearish sentiment, the volatility index, the rate of change for the S&P 500, and the new highs/new low ratio of the NYSE.    This weighted average is then smoothed with an 8 week rolling average to eliminate a lot of the noise. While most analysts look at these indicators individually, we combine, weight and smooth them to provide a more global look at market psychology and sentiment.   Currently, that outlook is very bullish which, as a contrarian investment manager, this is a time to begin raising cash and hedging risk in portfolios."

Raising cash and fixed income levels back in April has played very well for us during this summer's "Market Madness".   As you can see above the indicator is now moving into the extremely bearish territory which certainly perks up our antenna that an better buying opportunity is soon approaching.   With all the psychological indicators that are measuring market emotions - "the markets can remain irrational longer than you can remain solvent",  which is why we always combine our psychological "fear" guage with more standardized technical indicators in order to "confirm" turns in the market.

sta-bollinger-bands-weekly-083011As asset managers for mostly retired individuals it is not our job to catch the exact bottom or top in the market.   Our job is to manage risk in the specific portfolio allocations and to minimize losses while capturing gains during volatile markets.   Therefore, we look at weekly charts and indicators to strip out the daily "noise" from price volatility to better determine when and by how much to adjust portfolio market exposure.  As you can see in our weekly chart the markets are continuing to trace out a very similar patter that we saw during the last topping process in 2007-2008.

While I am not saying that we are about to enter into the great financial crisis, I am pointing out that the markets are currently exhibiting very similar behavior that should be paid attention to.   The current rally that started in March of 2009 ended in June. The completion of the topping process is identified by the break of both the previous uptrend (purple dashed line) and the break of the neckline (blue dashed line).   The market proceeded during the summer to become VERY oversold by exceeding a level of 2-standard deviations of the 50-week mean.   This is no small feat.  We accurately predicted in our weekly newsletter (pg 15) at the beginning of June that this could possibly occur as federal stimulus in the form of QE 2 came to an end.  As you can see in the weekly chart the most logical point of this advance in the next couple of weeks will be the old neckline as well as the 50-week mean.  

sta-bollinger-bands-daily-083111This should theoretically be the extent of this reflex bounce in the short term as the daily charts will be approaching, or already in, overbought territory.

This is shown at the bottom of the daily chart which is the Relative Strength Index of the market.  It is already 3/4ths of the way back to overbought conditions on a daily basis.  This is equivalent to driving a car down the freeway and only having a 1/4 tank of gas left.   

As the car runs out of gas it should give way to a pullback to some level of support and provide a much better risk based opportunity to re-enter the markets for a potential end of year advance.

Still On A Weekly Sell Signal

So far, sta-buy-sell-indicator-083111none of this takes away from the larger fact that the economy is slowing down, corporate profits are weakening, and there is a lot of risk contained in Europe that could back-splash very rapidly into the U.S.   This is clearly a bounce within a negative market trend at the current time and is not a new bull market to chase.   With fundamentals of stocks deteriorating along with the economy, we see reason to take on excessive speculative risk at the current time.  We are most likely witnessing end of the month portfolio rebalancing as the markets head into a long labor day weekend market.   The light volume rally also does not invoke confidence in a continued push higher. 

This analysis is all in advance of QE 3, which could certainly change the complexion of the market and the analysis. However, that will also clearly show up in our signals and we will adjust accordingly.   It is ALWAYS better to wait for the signal to change rather than trying to anticipate the change...many people have been hit by buses trying to jump the light.  Therefore, we don't recommend chasing this rally until signals clearly provide a better opportunity. 

Our primary buy/sell indicator is still firmly in SELL territory which automatically reduces equity exposure by 50% from normal allocations and increases fixed income holdings and cash.   Until this indicator turns back to positive we will remain underweight in our models in equity and simply use the shorter term signals as noted above as trading opportunities to create additional alpha until such time as the risk/reward ratio is clearly aligned back in our favor.

Have a great Labor Day weekend.

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mfoste1's picture

what a fucking terrible article or at least change the title to something useful

SheepDog-One's picture

More fancy napkin scribblings. Buy if you want to, but dont say its due to 'techincals' because thats plain BS.

mcguire's picture

i thought there were some pearls in here.. esp. liked "the market can stay irrational longer than you can stay solvent".. 

max2205's picture

Who knows. The Bernake knows

DeadFred's picture

Bernanke is no longer in control. He's been running scared since the tsunami and still doesn't know what to do. QE3 kills the dollar and brings on killer (literally) inflation levels. No QE means S&P below 900 and Obama hits the unemployment lines himself.

reader2010's picture

In terms of gold or crude oil, has the stock market made any new high since march, 2000? 


“It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.” - Mark Twain

Timmay's picture

I thought everyone here gave up on "predictions" of a manipulated and irrational stock market??



1. Bear Market

2. Bull Market

3. I could give a fuck.

That should be the headline.

kito's picture

what about a unicorn market?

SheepDog-One's picture

Exactly right Timmay, anyone trying to tell me about 'stock markets technicals' has a screw loose.

Robslob's picture

NOTE: Stay out of the market until we figure out what we are going to buy then tell YOU to buy.

Thank You,

Senior Management

zorba THE GREEK's picture

The market is neither overbought nor oversold, it is overmanipulated.

Boilermaker's picture

Yea, but then how will TA snakeoil salemen sell 'premium content' to ignorant rubes?  TAKE IT BACK!

SheepDog-One's picture

How can something be 'extremely oversold' when by any real measure its at least 50% overvalued?

Overmanipulated Ponzi.

Bob Paulson's picture

You've got no idea what you are talking about, SheepDog-One.

Plenty of traders will tell you that the short term is easier to predict than the longer term. Nothing goes up or down in a straight line. There are always retracements. That's the way it has always been, that's the way it will always be.

When markets are 'extremely oversold' on technicals, they rebound. Short term traders don't care about value, they care about trend.

There's a ton of pro's out there who use technicals. Even guys like Marc Faber talk about them. Watch Paul Tudor Jones' documentary 'Trader'.

Is the market 50% overvalued? I wouldn't doubt that for a second, but traders look at technicals. Save the fundamentals for the buy and hold investors believe Wall Street analysts, will get their heads handed to them in due course.

Don't criticize something you don't understand.

SheepDog-One's picture

OOOOH riiiight, I just dont get it...and technicals really are driving this market and YOU of course predict it daily. Sit down and shut up moron.

sheeple2012's picture

this guy manages other people's money?

Boilermaker's picture

He's selling the 'buy high' and 'sell higher' concept.

JohnG's picture

Is that a problem?  It works until it doesn't, and it has.  Until it doesn't.

Long-John-Silver's picture

That's the best kind money to manage. If he loses it there's no skin off his back.

Boilermaker's picture

It's neither because this isn't a market.

mfoste1's picture

ahhhhhhhhh!  {*light bulb going off in head*}

Boilermaker's picture

The glass isn't half empty or half full.  It's just twice as big as it needs to be.


Two wrongs don't make a right, but, three lefts do.

Just something to ponder.

SheHunter's picture

.............Two wrongs don't make a right, but, three lefts do....................

Sincere thnx for posting something profound enough to warrrent a response.  In the midst of all the pseudo-intellectual banter...this simple line of ten words captures the essence.  What essence ask you?  Said eesence say I.  Grave thnx.

jsavage's picture

is this a joke?

jsavage's picture

is this a joke?

Id fight Gandhi's picture

It might go up it might go down, but subscribe to our newsletter for a fee to be hassled by 20 something money managers who will piss away your life savings. After all youre way too busy to deal with this investment stuff, leave it to the pros!

Rainman's picture

Forget the charts and stat dweebs. Watch the 4 central banks. That is all.

JW n FL's picture

it isa running of the bulls!!

get your money in the market!!


it is 11,600(ish)!!!

it can only go up!



The Deleuzian's picture

The deadwood has yet to be removed... No new bull market....

But with printing presses.. it can look like a bull market...

I dig the Mark Twain!!

'History doesn't necessarily repeat, but it certainly rhymes'

Alea Iactaest's picture

It is better to keep your mouth shut and appear stupid than to open it and remove all doubt.


-- Mark Twain

rfbear's picture

Fool me once, shame on you.  Fool me twice shame on me.  Fool me three times...I dare ya!

Not For Reuse's picture

LOL how about July '09, July '10, Aug '11?

Boilermaker's picture

I think they only say that in Tennessee.

JohnG's picture

Tyler/Sacrilige can we have the links to out last few posts back under "My Account" back.  It's probably hard on the database, but it certainly is useful for tracking replies.

Thanks for your consideration.


New_Meat's picture

OT--yah, but one rather understands how hard this is in the mix.  But +1 - Ned

rfbear's picture

I was thinking more along the lines of QE1, QE2, QE3 carrot.

homegr0wn's picture

My browser says, but this is clearly a article.


LynRobison's picture

So I am supposed to consider buying into a stock market that is manipulated, levitated, high-speed traded, and over-rated in order to accumulate more paper dollars whose value is about to evaporate? Why exactly would I consider doing that?

Boilermaker's picture

Well, I declare!  Haven't you heard?  It's the only real option available.  Everyone is doing it.  No interest in a savings account.  Treasuries suck.  Bonds suck.  You HAVE to get on the merry-go-round.

DeadFred's picture

Because the nearest casino is too far away and kicked you out?

caerus's picture

you should consider shorting it

drivenZ's picture

this market is called the "QE3 being priced in" market...After which, there is no where to go but down.

Djirk's picture

to me this looks like a traders market, long term trend down......despite QE 1 & 2 (and threats of QE3 the market is around 20% off the 07 highs and the recent peaks were 13% off the 07 highs....look out below when the debt/inflation from QE remains but the benfits are gone (until wage driven inflation kicks in)

rfbear's picture


Really.  How do you know?  That's what people here have been saying for two years and I've been thinking along those lines up til now too.  I still think that your view and all of the supporting evidence is still valid but it doesn't seem to make any difference.

I know we're all a little sensative here about what the market is and isn't and I agree with most here.  It is a sham.  However, it is what it is and that's what we have to work with.

The Deleuzian's picture

Well said rfbear!

most if not all bloggers here know manipulation/fraud/corruption/ is everywhere!  IMHO,  'you cant change the primary trend' mantra is still valid in the end..Any sane, rational, intelligent person here @ ZH should be upset and sensative about the markets.  But god dammit! It's still our manipulated markets!!