Guest Post: Is the Market Rally "The Real Thing" or Just More Perception Management?

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

Is the Market Rally "The Real Thing" or Just More Perception Management?

A few charts call into question the current euphoric rally in most global stock markets.

The growing consensus among technical and fundamental analysts is that the stock market has bottomed for the year and is now in full rally mode. There are five basic arguments in favor of a "real thing" rally that runs higher for months to come:

1. Stocks almost always rally in November-December, and end in positive territory in the 3rd year of the presidential cycle (2011)

2. September data in the U.S. was mildly positive, fears of recession have faded

3. Corporations like Google and Catepillar are posting blow-out earnings

4. Europe is finally solving its debt crisis in a comprehensive fashion

5. China is still growing and thus is still the tugboat pulling the global economy ahead

There are seven factors on the other side of the ledger:

1. The ECRI announced the U.S. is already in recession: ECRI Recession Call: ‘You Haven’t Seen Anything Yet

Recession is a binary: the U.S. is either in a recession or it isn't. ECRI says it is, the stock market is assuming it isn't. Only one can be correct.

Question: if the U.S. is already in recession, how can that be positive for incomes, tax revenues, sales and ultimately, corporate profits and stock valuations? Bulls have to answer this question; ignoring it is not an option for any risk-conscious investor.

2. China's stock market has failed to join the global euphoria: The Shanghai Indicator ( has fallen to multiple critical support levels and is still declining.

Question: if China's growing so wonderfully, then why isn't it own stock market soaring? Perhaps the data supporting the official story of 8-9% growth (as usual) is more "perception management" than reality. If it was real, then why aren't Chinese stocks soaring along with other global markets? Once again, Bulls have to explain this disconnect; ignoring it is not an option for any risk-conscious investor.

3. Despite its 7% rally yesterday, copper is in a clear technical decline. Given its historical role as leading indicator of stock market trends, then this suggests global markets are due for a massive decline, not a rally. Bulls have to explain this disconnect; ignoring it is not an option for any risk-conscious investor.

Here is a chart of copper, courtesy of The Chart Store (subscription required to access a vast array of financial and economic charts):


4. If the E.U. solves its debt problems by effectually transferring bad bank debt to the sovereign balance sheets of Germany, France, Finland, et al., then taxpayers will see their incomes significantly reduced by austerity and higher taxes, in both debtor and "savior" nations.

Incomes and GDP are already declining in the weaker EU nations which have supported Germany's export-dependent economy by importing billions of euros of goods from Germany. What happens to German exports in Europe as its customers' economies contract?

Question: how can lower incomes, and thus lower sales and lower profits, possibly be supportive of higher stock market valuations? There is no free lunch; the hundreds of billions, and possibly trillions, of euros needed to save the banks and bondholders from losses will come out of the pockets of taxpayers and recipients of State/government payments. That necessarily means those taxpayers/recipients will have less income and thus less money to spend. More government revenue will be devoted to interest payments, and so less will be available to transfer to citizens.

Question: will the supposed benefits of saving large European banks via massive taxpayer-funded bailouts offset the declines in personal income which the bailout will require? How is a dramatic decline in personal income supportive of higher profits and higher stock valuations? Bulls have to answer this question; ignoring it is not an option for any risk-conscious investor.

5. Technically, the chart of the S&P 500 has some bearish elements:




-- A classic megaphone pattern has emerged, a pattern which is usually a topping formation.

-- The current rally could be forming the right shoulder of a long-term head-and-shoulders top. If we examine the "head," we discern a classic head-and-shoulders pattern; the break of the uptrend set up a test of the neckline, and now the current rally is the right shoulder of a multi-year top.

A decisive rally above 1,350 to new highs would of course negate this pattern.

There are also some similarities to the 2008 time frame just before the meltdown. For example:



6. The market's valuation is still extremely rich in terms of the nation's GDP:



7. Perception management. Since the Powers That Be have publicly proclaimed the stock market is their chosen proxy of the American economy, then we have to ask: would it be in the interest of the Status Quo to engineer a rally? The answer is obviously yes; a decline in the market would negate the official happy story that everything's fixed, there is no recession, etc.

Then we have to ask: what's the best way to engineer a rally? Answer:

A. Crank the market higher in light-volume periods such as pre-market and the last 30 minutes of trading. Evidence: most of the big gains of the past three weeks have occurred in pre-market or the last 30 minutes of trading.

B. Manage perceptions of future Federal Reserve/Central Planning "easing" via rumors of yet more buying of mortgage-backed securities, speeches by top toadies discussing more "easing" programs are in the works, and all the other usual techniques of Central Planning propaganda.

C. Goose the markets above key technical levels, which then triggers computer "risk-on" buying that turns a Central Planned rally into a self-sustaining "the real thing" rally.

Technically, this rally hasn't shown the big volumes of "real rallies." That in itself should spark some skepticism about the nature of the rally.

Bonus chart: As The Chart Store's Ron Greiss notes on this chart, analog charts are interesting but not necessarily predictive. Nonetheless, they offer potentially valuable "food for thought." This one is worth studying, as the present has tracked the 1907 chart to an uncanny degree. We can posit that the only reason the market didn't roll over last year was the Fed's "surprise announcement" of QE2. Perhaps this extend-and-pretend strategy will be followed by the decline witnessed in the 1907 chart.



For a similar chart, please see Doug Short's Real Mega-Bears Chart which overlays the current SPX against the Depression-era Dow and the post-crash Nikkei.

Has perception management replaced fundamentals as the foundation of all stock market rallies? Investors with an eye on risk would be well-served to ponder the question, and its many implications.

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danger close here's picture

How much has earnings growth been the direct result of dollar devaluation?

eureka's picture

I'll answer with a question… Is the Fed calculating to kill, not just savers, but demand?

Less demand = falling commodity prices.

What do y'all think?

AnAnonymous's picture

Ben "True USA patriot" really worked his ass off to protect US citizens' best interests.

Well, all the gibberish about eliminating the non consumers in an overconsumption crisis is entertaining but yields little when applied.

On the reverse, pushing other big gluttons out of the path, preventing them from guzzling resources, delivers much more.

Ben Bernanke knew that and let US citizens enjoy their recess by wallowing in cheap propaganda on how killing third worlders who do not consume would free resources, but as the man he is, he couldnt not allow himself not to deal in reality and had to kick the other gluttons out of the path to protect US citizens' best interests.

Ben Bernanke is a USA hero.

Ruffcut's picture

Ben is a lying sack of shit, times a billion.

Ananal, is a complete asstroll. I hope you choke on your boyfriends dick.

buyingsterling's picture

If the fed's actions benefit US citizens, then you and your fellow countrymen are the dumbasses. You're getting bent over and can't do anything about it - you get no benefit at all. Why are you so weak and impotent?

eureka's picture

ANANONYMOUS - Your theory might be interesting if you could identify the "other big gluttons" who are now "pushed out by Bernanke" - as opposed to the median US household who is factually pushed down...

- even then, if you were to deliever such "proof" of your theory - it would still leave Bernanke identified as a submissive, co-responsible servant of the evil US Elite Empire - because, it is by definition evil to disenfranchise, empoverish and financially enslave anyone - i.e. it does not matter if you do evil to "your own" or to an "other"





GardenWeasel's picture


"...but as the man he is, he couldnt not allow himself not to deal in reality..."

dude, you have 3 "nots" in one sentence.  what are you trying to say????

TruthInSunshine's picture


Equity markets are back, on a nominal basis, to where they were 13 years ago, and on a real, inflation-adjusted basis, to where they were 26 years ago -

- and this doesn't even count the trillions in 'equity value' that went to $0 or pink sheet level, with those stocks being tossed out of the major indexes (ahem, part of the fraud that is the equity investing game), that aren't now even counted in the carnage tally, such as when General Motors was tossed out of the Dow, ultimately to reach $0, with the Dow being 're-jiggerd' (as it has so many other times) otherwise called 'survivorship bias (the "dirty" topic Jeremy Siegel will try and avoid speaking of at all costs).

I think we've turned Japanese (but not for the exact same reasons). Nikkei has gone from 40k to 8k from 1989 to today - we're going to be showing similar long term performance on U.S. and European indexes going forward Iin addition to what we've already declined from the 'top').

Secular bear market has been with us and will continue for a long time.

The Great Deleveraging is going to be a bitch, bitchez.

Thisson's picture

I agree with your thesis, but the market hasn't agreed with me.  My S&P Short ETF position is still significantly underwater, 3 years after realizing that we're repeating Japan's mistakes. 

El Viejo's picture

Yeah, my foray into FOREX with a seasonal short the Yen went terribly wrong also. (lucky for me it was just an experimental amount) It took a nuclear meltdown to get some of it back, but I think things are about to take a BIG turn. I give it 3 months tops.


Barometer's picture

You should check out some of the old investor newsletters from Hugh Hendry about the dangers of being short the Yen....especially if you think China is about implode. Carry trade repatriation BichEz

CvlDobd's picture

Sounds like some reading on risk management and harvesting positions via price targets or stop losses is in order. 

El Viejo's picture

Ha! yeah, I learned a lot about FOREX real quick and I also learned about seasonal investing in bizzaro times such as these, but I'm still holding the relatively small amount (a few thou). But this brings up the very good point made by the author concerning an election year. Will others repeat my mistake by investing in the pre-election year rally this Fall?

TruthInSunshine's picture

Here's a micro example of the macro thesis: Whitney Tilson was early on his Netshit call. He shorted too soon. But he was right about the fundamentals, subscription outlook, and most other trending real data points.

Anyone looking at a 3 year chart and getting hopped up on Hopium regarding equity fecal matter will be just as wrong, long term (I'd argue intermediate term, as well), as Tilson was over his barely too-short horizon (look how right he looks just after his shorts got taken out).

Head & Shoulders (and then knees and toes for 'investors' - bagholders) of equities. The long term chart of equity markets coupled with a sane, rational analysis of economic fundamentals & the state of the health of nation-states (with extremely few exceptions) knows that the deeply entrenched trend has already painted a bearish portrait.

SheepDog-One's picture

Yea, hooray, markets are where they were in 1999, throw in dollar devaluation probably mid 80's levels. Yea markets are doing so good.

TruthInSunshine's picture

Forgot to add:

The great AUM scam will not be the way to build one's own fortune (while fleecing 'valued investors') over the next 20 years, as it was over the past 20, as even themost sheeplish sheeple know that equity markets are the biggest scam ever devised and marketed (having sovereign nations borrow money from loan sharks and force their citizens into debt servitude  is technically bigger, if onbly by the numbers, but I digress).


rocker's picture

Just like our Banking system being held up by artificial means, so is the rigged stock market.

Actually, it looks like Europe might just do the right thing. Let the system Flush and let the bond holders take their looses.

Then; after the flush Europe might be the best investment in the World.

Meanwhile the U.S. Markets are still rigged and looks like they will be for another 10 years.

T.R. Price reports that redemtions were at a all time hight.

We are Worse than Japan now.     Even Europe will be better than our markets.

TruthInSunshine's picture

Thisson - I'm not talking about 3 years. Pull up a chart. The market has spoken; the market has gone nowhere in nominal terms in 13 years and has lost about 30% or more in inflation-adjusted terms. Any retail investor has done far worse, due to various schemes/scams, index ticker symbol re-jiggering (hello, General Motors shareholders, and many others of many more companies that magically go "poof" and are replaced with the newer, better stock du jour).

The 'equity markets' are a rigged game that allow NYC's economy to thrive as the esteemed people of finance and investing play by a system whereby they can't lose (they make big fortunes when the market soars, and they make smaller fortunes when the market invevitably crashes, rinse, lather and repeat - hello 2/20, 4/40 and even moreso).

For every winner (i.e. the 'professionals' who are paid regardless of market performance and the performance of their own horrid calls) of the equity market game of wealth destruction, there are far, far more than 1 loser. That ratio is about 1 to 50 (and 1 to 1,000 once the inevitable taxpayer extracted bailouts factor into the equation).


DCFusor's picture

On the other hand, this whole time I've been making money swing trading, both sides, and pretty good money too.  It's true that buy and hold, particularly in broad jiggered indexes is not living up to the myths put on about it.  And the brokers that tell you to hold through dips because you'll miss the bounce have ALWAYS been totally full of it, and too lazy to trade well -- their fear isn't that you'd miss the bounce, it's that when you get in, it won't be with THEM for more juicy fees.

A smart behaviorist/TA does quite well no matter the markets overall.  All you need is motion to make money, you don't actually care which way or on what.

LawsofPhysics's picture

Losing the least is now winning, good questions, certainly all the world can't be Japan can it?  Oh wait, mars just called, don't worry they will be happy to purchase earth-made products.  We are all saved, let the "growth" charade continue.

SheepDog-One's picture

WTF we've suddenly gone from Eurozone implosion with 60% haircuts, end of the road for printing, 100% debt/GDP, to a analysis of markets based upon historical yearly trends? Sorry I cant even begin to take this seriously.


Tyler, I missed this rally,although I almost bought some itm sept 112 spy calls for 2 that closed at 10. The next time a whole continent is about to implode and render a 5x return in 3 weeks, PLEASE! let me know!

prophet's picture

Happens all the time ....

SLV 32 Call 4 banger today, in a few hours  

The Swedish Chef's picture

"Europe is finally solving its debt crisis in a comprehensive fashion"


What the fuck have you been smoking?

Robot Traders Mom's picture

Slow down chief, and read.

He posted it as an arugment people are saying in favor of a recovery, IE Steve Lies-man.

SheepDog-One's picture

Right, but hes not arguing against it much.

AnAnonymous's picture

Is it required? Just looking at the circus European US citizens are running is enough to give serious hints.

Usually, when US citizens start to mock their own duplicity (as Merkel and Sarkozy did when asked about Italy capacity to reform), bad days are ahead.

SheepDog-One's picture

I think it is required, every Wall St media news outlet is waving pom poms about the 'great recovery' so I think more people need to take a firm stance blowing that position out of the water instead of 'implying' it.

Robot Traders Mom's picture

C'mon sheep dog, you are smarter than that. He spends the whole article talking about all the bullshit going on right now.

You are on here everyday and have read Charles Hugh Smith. He's about the biggest bear and cynic out there. In no way is he saying anything but we are fucked.

SheepDog-One's picture

He does say it, but sure takes him a long time getting around to it, then its done thru a wink and a nod. I get his style, but it would be nice to have more people come out calling direct bullshit on it.

LongSoupLine's picture

Something about bees and honey rather than vinegar comes to mind with that style.

Example:  Look at Ron (vinegar) Paul.  He's direct, blunt, honest, no pulled punches. Hence, not in with the front-runners (hell, he's not even mentioned).  I'm not saying he should change who he is, or what he believes in, but if he truely wants to effect change, he's going to have to play the "popularity game".

Obama played the "popularity game" to perfection, he got the big seat and is doing what he "intended" to do. (read: Chicago politics).


The Swedish Chef's picture

But people that say that actually believeing it are counted on one hand without having to use all fingers. Then there some liers that just say it but general consensus amongs people who got permition to speak freely is that there is no solution in sight.

SheepDog-One's picture

I dont get that statement at chaos out of Europe is deemed as 'Solving its crisis in comprehensive fashion'? 

This article by Charles is wishy washy, I usualy like his stuff.

disabledvet's picture

If no less than Albert Einstein was concerned by the power of the media in his adopted land of America then of course we must assume perception becomes reality. The media complex makes money. What else do we expect? If your question is "a recovery with unrest" ...

orca's picture

It is all a big pile of BS. We all know it, even Jim Cramer knows it. So yes this bitch can meltup, but not without a corresponding move in PM. So we can have fun at the market, like my girlfriend just lóóóves to go to markets too, but in the end it will come to nothing. Only tangible will (relatively) save you after the endgame has come to pass.
Keep on laughin' folks, they can't take that away.

Piranhanoia's picture

Can anyone point to real time futures charts?   nifty has been down for days

ghostfaceinvestah's picture

The stock market is a policy tool, always has been, but it really started being used heavily once Geithner took over Treasury.

KandiRaverHipster's picture

meh i've never taken the Shangai index seriously, all you need to do is invest in companies with 8s in their tickers.

writingsonthewall's picture

"1. Stocks almost always rally in November-December, and end in positive territory in the 3rd year of the presidential cycle (2011)"

Is that an argument?


This sounds like an old wives tale - like "the wind always blows from the east on sunny days"

Sounds a bit desperate to me.


The markets know FUCK ALL - which is why they are currently panicking at the cancellation of tomorrows (never going to resolve anything) meeting.


Those of us who do not gamble in markets saw this coming a long way off.

It's all about history and trends - not tips, tricks and market fundamentals.


I mean look at the reaction to BP today - a big boom based on the MSM announcement of BP 'doubling it's profits' - forgetting to mention this is 'doubled up' from a post Gulf profit disaster.

No mention of Bob flogging shed loads of assets to raise cash to protect the company from huge payouts which contributed to this profit.

Any moron can see BP's short term gain is going to be long term pain - except market morons of course who jump to the tune of wankers like Cramer and their cheerleaders of prestitution.


Markets are now playing the game of 'second guessing Government' - watch how they squel when the Government finally does something they didn't expect. allowing Greece to default with a 80% haircut for example. That will expose the sheep from the wolves.

SheepDog-One's picture

If the caterpillars in Oct have more red hairs than yellow hairs....BULLISH!!

Boston Wealth's picture

Market Rally you say?

How to catch over 100 ES (E-mini S&P 500 futures) point rally!

0cz's picture

Ridiculous that there is even a term 'Perception Management' that is used in regards to economics. 

Bob:  It looks like it is pouring rain outside.  Better grab my raincoat. 
Jim:  That is just your perception.  My real-time meteorological analysis shows that it isn't raining now and it probably never will.  Only a moron would wear a raincoat today. 

That is their 'Perception Management'. 

Syrin's picture

As goofy as your analogy may be, that does seem to be what is happening with the market.   It (and the masses) is acting in defiance of the economic realities we face.

toady's picture

Years ago I had a manager that was into 'managing perceptions'.

She was always telling me things like 'your department is percieved as...' And 'this employee is percieved as..'

I eventually had to tell her 'my department IS..' 'this employee IS... There is no perception, what is IS.

LongSoupLine's picture

(conversation continued):

Bob: But, it is raining and I'll get wet.

Jim: Perhaps, but even if you do get wet, the Fed will provide us special few with free hairdryers, laundry service and dry custom taylored British suits to counter our stupid decision to not wear raingear.  The best part is, the middle class will pay for all this as we repeatedly tell them that not only is it NOT raining, but even if it was, it's transistory.

Bob: Yeah but the reality is, it's raining so hard, it's beginning to flood!

Jim:  When it floods from the raining, we will get super pumps from the Fed, again paid for by the middle class.  However, as their (pumpless) homes wash away, we will inform them that water front real estate values are going up, and direct blame to politicians and insurance companies who won't help them.

Syrin's picture

To me, believing in the market right now is like believing in flying pink elephants.   You have to WANT to believe it.   All major economic indicators tell us something REALLY bad is going to happen sooner than later.   The masses don't know where else to store their money.   Banks, bonds and mutual funds.

Ronaldo's picture

Did you see them flying around TOO??