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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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Wed, 08/31/2011 - 18:48 | 1620912 mfoste1
mfoste1's picture

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

Wed, 08/31/2011 - 19:10 | 1620979 candyman
candyman's picture

ugh,painful

Wed, 08/31/2011 - 19:36 | 1621029 SheepDog-One
SheepDog-One's picture

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

Wed, 08/31/2011 - 20:59 | 1621220 mcguire
mcguire's picture

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

Thu, 09/01/2011 - 00:35 | 1621722 AnarchoCapitalist
AnarchoCapitalist's picture

Keynes said that.

Wed, 08/31/2011 - 18:47 | 1620913 max2205
max2205's picture

Who knows. The Bernake knows

Wed, 08/31/2011 - 20:08 | 1621105 DeadFred
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.

Wed, 08/31/2011 - 18:49 | 1620920 reader2010
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

Wed, 08/31/2011 - 18:50 | 1620921 Timmay
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.

Wed, 08/31/2011 - 19:07 | 1620969 kito
kito's picture

what about a unicorn market?

Wed, 08/31/2011 - 19:37 | 1621036 SheepDog-One
SheepDog-One's picture

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

Wed, 08/31/2011 - 18:49 | 1620923 Robslob
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

Wed, 08/31/2011 - 18:50 | 1620928 tawdzilla
tawdzilla's picture

Dead Cat Bounce

Wed, 08/31/2011 - 18:52 | 1620929 zorba THE GREEK
zorba THE GREEK's picture

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

Wed, 08/31/2011 - 18:58 | 1620944 Boilermaker
Boilermaker's picture

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

Wed, 08/31/2011 - 20:18 | 1621125 SheepDog-One
SheepDog-One's picture

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

Overmanipulated Ponzi.

Thu, 09/01/2011 - 07:03 | 1622084 Bob Paulson
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.

Thu, 09/01/2011 - 08:54 | 1622251 SheepDog-One
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.

Wed, 08/31/2011 - 18:52 | 1620930 sheeple2012
sheeple2012's picture

this guy manages other people's money?

Wed, 08/31/2011 - 18:59 | 1620946 Boilermaker
Boilermaker's picture

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

Wed, 08/31/2011 - 19:35 | 1621025 JohnG
JohnG's picture

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

Wed, 08/31/2011 - 19:00 | 1620948 Long-John-Silver
Long-John-Silver's picture

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

Wed, 08/31/2011 - 18:57 | 1620940 Boilermaker
Boilermaker's picture

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

Wed, 08/31/2011 - 19:01 | 1620951 mfoste1
mfoste1's picture

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

Wed, 08/31/2011 - 19:08 | 1620970 Boilermaker
Boilermaker's picture

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

-OR-

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

Just something to ponder.

Thu, 09/01/2011 - 01:38 | 1621828 SheHunter
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.

Wed, 08/31/2011 - 19:05 | 1620960 jsavage
jsavage's picture

is this a joke?

Wed, 08/31/2011 - 19:05 | 1620961 jsavage
jsavage's picture

is this a joke?

Wed, 08/31/2011 - 19:21 | 1620997 Id fight Gandhi
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!

Wed, 08/31/2011 - 19:12 | 1620985 Rainman
Rainman's picture

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

Wed, 08/31/2011 - 19:13 | 1620987 JW n FL
JW n FL's picture

it isa running of the bulls!!

get your money in the market!!

hurry!

it is 11,600(ish)!!!

it can only go up!

LOL!!

ALL those SHORTS CAN NOT BE RIGHT!!

Wed, 08/31/2011 - 19:18 | 1620995 The Deleuzian
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'

Wed, 08/31/2011 - 19:38 | 1621038 Alea Iactaest
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

Wed, 08/31/2011 - 19:22 | 1620998 buzzsaw99
buzzsaw99's picture

lulz

Wed, 08/31/2011 - 19:36 | 1621027 rfbear
rfbear's picture

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

Wed, 08/31/2011 - 19:46 | 1621057 Not For Reuse
Not For Reuse's picture

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

Wed, 08/31/2011 - 20:10 | 1621106 Boilermaker
Boilermaker's picture

I think they only say that in Tennessee.

Wed, 08/31/2011 - 19:41 | 1621047 JohnG
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.

JG

Wed, 08/31/2011 - 20:50 | 1621189 New_Meat
New_Meat's picture

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

Wed, 08/31/2011 - 19:46 | 1621060 rfbear
rfbear's picture

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

Wed, 08/31/2011 - 19:49 | 1621066 homegr0wn
homegr0wn's picture

My browser says zerohedge.com, but this is clearly a cnbc.com article.

WTF. MIND BLOWN.

Wed, 08/31/2011 - 19:50 | 1621069 LynRobison
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?

Wed, 08/31/2011 - 20:12 | 1621109 Boilermaker
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.

Wed, 08/31/2011 - 20:14 | 1621117 DeadFred
DeadFred's picture

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

Wed, 08/31/2011 - 21:41 | 1621330 caerus
caerus's picture

you should consider shorting it

Wed, 08/31/2011 - 19:58 | 1621089 drivenZ
drivenZ's picture

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

Wed, 08/31/2011 - 20:28 | 1621142 Djirk
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)

Wed, 08/31/2011 - 20:35 | 1621160 rfbear
rfbear's picture

Driven

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.

Wed, 08/31/2011 - 20:54 | 1621203 The Deleuzian
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!!

Wed, 08/31/2011 - 22:48 | 1621505 drivenZ
drivenZ's picture

I'm talking short term...but there are many long term underlying facts pointing to a troubled economy(all presented here at ZH, albeit less than neutral). I mean just look at the cratering GDP after a mountain of stimulus that is just starting to wear off. There is no catalyst that I can see.
So you have a bunch of short term money sloshing around in the markets waiting for the next news story. Hence the volatility.

Thu, 09/01/2011 - 00:18 | 1621692 sellstop
sellstop's picture

Yea, things looked absolutely fucked in the mid 1980's. Things always look worst at the bottom. Not saying we are at a bottom, you can only see bottoms in hindsight, but the stock markets' "tenor" has changed lately. The selling is not urgent and there is buying on the dips......

gh

Wed, 08/31/2011 - 20:43 | 1621169 mynhair
mynhair's picture

Ask fukking Leo.  You guys are only good for posting some news.

Amerikan chickens, are coming home to roost!

And they'll be on sale next week.

Just watch out for the dark meat.

Wed, 08/31/2011 - 20:48 | 1621185 ZippyDooDah
ZippyDooDah's picture

I guess the commenters in this thread are not short-term market traders.  Why would I think that?  Cause of yer total lack of com-pre-hen-sion of the mind set and lingo of those who don't give a fuck if the market goes up or down, but just want to make some damn money!

Wed, 08/31/2011 - 20:53 | 1621198 Chippewa Partners
Chippewa Partners's picture

Is it a market or a crime scene?  I thought markets were between people instead of mainframes and dark pools.  Geesh, what was I thinking?

Wed, 08/31/2011 - 21:17 | 1621263 rfbear
rfbear's picture

Zippy

I am not either.  My goal is to try to stay on the right side of the market in the medium term.  I have been waiting for the bear market to re-establish itself (it seems forever) but everytime we see a light at the end of the tunnel Bernankenstein shoves his ugly mug in there and fucks it all up.  It is very frustrating to watch this over and over.  From this point forward, the market is going to have to prove to me that it is going to go where we all think it should go.  That said, I will turn on a dime when the evidence presents itself.

Thu, 09/01/2011 - 00:15 | 1621684 sellstop
sellstop's picture

Zippy,

A word to the wise. The middle aint where you want to be. The middle gets killed. You've got to be shorter term than most, or longer term than most.

Why do you think the rush to HFT?

And cash is an option. It is not necessary to "turn on a dime"....

gh

Wed, 08/31/2011 - 21:23 | 1621281 eddiebe
eddiebe's picture

'It's hard to make predictions, especially about the future'.  Yogi Berra.

Wed, 08/31/2011 - 21:40 | 1621325 The Deleuzian
The Deleuzian's picture

when there's a fork in the road, take it!

Wed, 08/31/2011 - 21:32 | 1621308 caerus
caerus's picture

bearish bitchez

Wed, 08/31/2011 - 21:46 | 1621342 Monedas
Monedas's picture

"Twistory always wepeats itself !"....B J Frank. Monedas 2011 Sent by God to fuck with Socialtards !

Wed, 08/31/2011 - 22:01 | 1621389 Cash-NonCash
Cash-NonCash's picture

New Title: Liger Market Confounds the Pikers, but the Pros lose by raising cash

Wed, 08/31/2011 - 22:49 | 1621507 nyse
nyse's picture

Am I missing something? Isn't he basically coming to the same conclusion that many of us have come to, albeit from a different angel? (i.e., That this idea of the new bull market that is being force fucked down our throats is actually bullshit)

If you think it laughable that this article was even put up on ZH (e.g., bc TA is "lower level" "finance"), then perhaps it was not intended for you and rather for those who are still on the fence (i.e., haven't taken the red pill yet).

The guy manages the money of retirees*, many of whom are too cemented in their normalcy biases to believe that anything deeper (or, dare I say, diabolical) than stochastic, or over/under bought levels, or whatever the fuck, could be going on. Perhaps he has to speak their language, or perhaps if he told them what what was really going on it would kill the poor folks.

But come to think of it, who gives a shit..

(*No offense to any retirees reading this -- although, on the other hand, please go fuck yourself promptly; it was actually your limp dick generation's ride on that 20 yr. Bull without questioning anything that got my generation into this fiasco, which is great, because now we'll get to spend the rest of our lives cleaning up your shit, literally and figuratively. So, thank you.)

Thu, 09/01/2011 - 00:11 | 1621669 sellstop
sellstop's picture

You are getting you generations mixed up Dilrod. The retirees are the ones that fought WW2 and lived through the Depression. It is the yet to retire that you have the problem with. Although I bet you have a problem with most anybody.

gh

Thu, 09/01/2011 - 01:51 | 1621801 bid the soldier...
bid the soldiers shoot's picture

Mary had a little lamb,
little lamb, little lamb,
Mary had a little lamb,
whose fleece was white as snow.

And everywhere that Mary went,
Mary went, Mary went,
and everywhere that Mary went,
the lamb was sure to go.

Okay, let's call Mary the Dow Jones Industrial Average.
And let's call Mary's little lamb every stock exchange and publicly traded stock in the known universe.

If you can move, say, 20 out of the Dow 30 in a certain direction for a day or two; or a week or a month and place bets on index options. You get the drift.

Okay, let's have a show of hands as to whether you think the NYSE has been manipulated since Joe Granville wrote about it in the 1970's and whether it is still being manipulated today?

Thu, 09/01/2011 - 02:22 | 1621884 seoerlin
seoerlin's picture

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Thu, 09/01/2011 - 09:25 | 1622357 Grand Supercycle
Grand Supercycle's picture

Bear Market Bounce.

The big picture remains bearish and this will ALWAYS exert the most influence. The only thing GUARANTEED is that the bearish medium/long term cycle will have the upper hand.

IMPORTANT CHART AT BLOG.

http://stockmarket618.wordpress.com

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