Wednesday, March 18, 2009

Six weeks

On March 3, I mentioned that the window on the rally had been shut by the ugly close of February 27th. I played a little on the short side until the big rally day of March 10th when I closed out most of my shorts, as the downleg appeared to be ending.

As of Friday, March 13, I switched to a net long position. I am now up to 12% long and looking to get longer if the positive action continues. I remain at about -1% YTD. Does it seem silly to be getting positive at S&P756 (Friday's close), which was about 14% above the "bottom"? Yes and no. Sure, if you are the best investor around, you could have bought at S&P666. However, I suspect that few did, when you exclude those who have been buying all the way down. There are probably a select few who have sat out the bear market (or profited) and who went long at S&P666ish. If you did, my congratulations as you are awesome. Personally, I know that I can not time the exact bottom. I do know that missing the 57% drop (and even being up in the bear market) has allowed me to be patient. Despite the 14% rise, we are only about where we were a month ago.

I am siding with the bulls here. There are many short term positives:

1) The market was hugely oversold at its low
2) There are lots of stocks and sectors that did not break their November lows
3) The ones that did (financials) have had a nice rally
4) We have had 3 big up days on generally good volume in the last 6 days. That hasn't happened in a long time.
5) Cooper, oil, retail and homebuilders are well above their November lows. These were some of the worst areas of 2008.
6) Bonds, the US dollar and gold are selling off, a sign that panic is dissipating
7) I believe that the market is starting to confirm that Q2 & Q3 GDP will not be as bad as Q4 2008 & Q1 were.

Six weeks. That is what I will give the bulls to make their case, as most of the bear market rallies in this bear have not lasted much longer than that. The subscriptions that I follow (which were all right big picture thus far) also confirm the recent bullishness.

My gut tells me that this is the classic bear market rally that will suck in a lot of people before ultimately going lower. This rally could last a lot longer than six weeks, however, and a sucessful retest at some future point, could allow a rally (or the March lows) to hold for a long period. I suspect that we should be fine until mid/late April and we could test or break the January highs (which would take us to roughly break-even for 2009 YTD). Expect a lot of congratulations by the establishment on their fiscal and monetary tactics as the rally extends. You will hear that the interest rate cuts, the gas price "tax cut", the quantitative easy and the stimulus is working (and it may for a short period).

I don't plan on "believing the hype!". Bear market rallies are not "stabilization" but the natural ebb & flow. I remain very bearish long term but I could change my mind on all of this tomorrow. I plan on discussing the catalysts for the next downleg in a future post, but expect soaring long term interest rates to be part of the problem. At first, sinking bond prices will be welcomed but our overleveraged economy can not survive high interest rates. (disclosure: long TBT, long various equities)

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