Is the tide turning for stocks?

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I posed the following question a few days ago: “Does the stock market rally have legs?” We have now had four days in a row of a higher market, something we have not seen since June this year. This is also the S&P 500 Index‘s biggest four-day surge (+18.0%) since 1933.

A sharply weaker opening yesterday as a result of a barrage of gloomy economic reports was followed by a reversal on the news of former Fed Chairman Paul Volcker’s appointment to a new White House Economic Recovery Advisory Board tasked to revive growth in the US. Involving the 81-year Volcker in this way is a smart move by President-elect Obama.

The table below shows the performances of various global stock markets over the past four trading days, as well as figures since the respective markets’ highs and for the year to date (all in local currency terms).

Click on the table for a larger image.


The gains of the various US stock market sectors since the November 20 lows make for interesting reading, with previous laggards such as financials, consumer discretionary, energy and materials showing the defensive sectors (health care, utilities and consumer staples) a clean pair of heels.


Interestingly, according to Bloomberg, Société Générale global equity strategist James Montier said he’s never been so bullish after the financial crisis dragged down prices of stocks, corporate bonds and inflation-protected government debt.

“This is a value investor’s version of heaven. From a bottom-up perspective, the equity market is offering some excellent companies at truly bargain prices for those with the fortitude to shut their eyes, or at least switch off their screens and buy.

“With all of these opportunities available I have never been more bullish! Will I be early? Almost certainly yes, but if I can find assets with attractive returns and I have a long time horizon I would be mad to turn them down.”

Barton Biggs of Traxis Partners, according to the Financial Times, said: “I have no idea when the next bull market starts, but I do think we are setting up for the mother of all bear market rallies.” He motivates this viewpoint as follows:

“Stocks around the world are very cheap.”
“Stock markets have been obliterated and are deeply oversold.”
“The fabric for economic healing is developing.”
“We must be pretty close to maximum bearishness.”

On the last bullet, Investors Intelligence points out that its sentiment indicator has improved from its historical mid-October low of -32.2% (i.e. percentage bearish advisors less percentage bullish advisors) to -15.1% – still signaling low risk to accumulate shares.


Another important development regarding sentiment is the fact that the CBOE Volatility Index (VIX) is threatening to drop below its 50-day moving average for the first time in almost three months. Given the inverse relationship between the VIX and stocks, this is good news for equity bulls.

Should the bullish seasonal tendencies hold true on this occasion, possible first targets are the November 4 highs of 9,625 for the Dow and 1,006 for the S&P 500. This will also result in both indices clearing their 50-day moving averages (see my post “Does the stock market rally have legs?” for a summary table of the key levels).

The question remains: have we seen an important turn to the upside? According to Richard Russell (Dow Theory Letters) we’ve had ten 90% down-days since September, followed by a 90% up-day on November 24. If the tide is in the process of turning up, we should now see a series of strong sessions. I will be keeping a close eye on market breadth in particular.

Although there is as yet little evidence that we are leaving the corpse of the bear behind (especially with Q4 earnings disasters looming in January), it would appear that the nascent rally could have more steam left.

All that remains is to say a big thank you to my readers for your support and friendship and wish you a joyous Thanksgiving!


Source: VosieSales

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13 comments to Is the tide turning for stocks?

  • Michael Mennell

    As usual lots of useful statistics and quotes. Always helpful when making decisions. I am buying stocks with high 2009 dividends i.e.10-20%.

  • Yes, we are going to get a strong rallye but next year we will get:

    • Much cheaper stocks;
    • More and more bearishness.

    Best Regards,

    Dax Speculator

  • Prieur:

    Just a minor note from a Canadian investor, our composite index is not called the Toronto 300 Composite Index. Rather it is the S&P/TSX Composite Index.



  • Fred: The data series I’m using is in actual fact the S&P/TSX Composite. For some reason the specific system I use for the performance round-ups refers to it as the Toronto 300. Is that perhaps the old name?

  • Frank Wordick

    Sorry, Jim! Despite my great respect for your advice, this time I have more respect for Johnny Cash’s, when he says… “I keep my eyes wide open all the time…”. I also prefer to stay lit up. I don’t care much for flying blind. In fairness to Montier, he does say — like Jeremy Grantham — that he is buying early. The trouble with Biggs’ position is that despite the fact that stocks are cheap, they can get cheaper. It is still the case that markets have the ability to go down and stay down according to Sedacca. Of course, Sedacca does say that this rally is likely to have more legs than most investors anticipate. Mauldin admits the rally could be big, but believes it to be just that — a rally. Remember that this is Thanksgiving week and consequently the market is thin. Funny things happen in thin markets. They are not hard to manipulate. “Economic healing is DEVELOPING.” Maximum bearishness? With this lot of advisors all bullish! The Q4 earnings reports in January are going to put a drag on the market. I think those million dollar currency notes are what the fat cats at Citicorp are passing around. The turkey is a very appropriate icon for Citigroup.

  • Frank Wordick

    I must have read this posting too fast, because I overlooked the two adjacent charts. The upper one apparently shows that the S&P500 has already broken thru its 2002 bottom. If this is correct, we may already be in trouble, big rally or no. People who need to lighten up or get out of the market entirely should see the present rally as a reasonably good opportunity for doing so. I have been watching the arguably less important DJIA, which hasn’t done what the S&P500 evidently has done. The lower chart gives the “Bulls/Bears Difference”. The wave is currently in steep downtrend, suggesting that we have further to go before the state of maximum bearishness is reached. The last downdip actually penetrated the bottom line of the trend channel by a modest amount. Not really welcome information for investors inclined to buy early.

  • […] Postcards asks, “Is the tide turning for stocks?” as well as Does the stock market rally have legs?” They share research, summaries of […]

  • Yes Prieur, the TSE 300 Composite Index is the old name for the main Canadian stock index.

  • Frank Wordick

    This comment refers to an article entitled “Mind Matters” by James Montier, the link to which
    ( was brought to my attention by Prieur. To be perfectly honest, I do not find a P/E ratio of 15 to be exciting. The bottom P/E ratio for the last bull market was 7. Of course, the price bottom occurred in 1975, while the P/E ratio bottom didn’t arrive until around 1982. Still, one wonders what exactly is driving Montier’s exhuberance. The fact that the bond market is saying it’s 1930 again could be telling us something. Montier did say elsewhere that he is almost certainly buying too early. It is possible that he is buying way way too early. Some analyst whose name I can’t recall provided us with an earnings chart sometime back. As I recall, the chart suggested that earnings have a fairly long way to fall in this cycle — maybe not by half but a good way anyway. In sum, I don’t see any compelling evidence to buy stocks. As to using a coffee can as an investment vehicle, I don’t advise you to try it, using stocks as a filler. You need to look at your investments from time to time. All kinds of terrible things can happen to companies over time and consequently to their shares. Remember the guy who bequeathed his railroad shares to his favorite charity with the attached proviso that the charity never sell them, because railroads would forever remain great investments! In the shorter term, there was Enron and Worldcon — I mean Worldcom. Please excuse the slip. The only thing that may arguably be worth burying in the back garden or hiding in a vault is hard assets like gold, gemstones, paintings by masters, etc. This whole article makes me wonder about Montier. Perhaps it is only a momentary aberration. Analysts do have them. Maybe his next publication will show him snapping back to a less bullish position. Or it could just be that Montier is carrying a huge amount of money in the money market and feels compelled to put it somewhere. This article may be a public attempt to justify his investment move. Edward Albert’s absence as co-author bothers me. He recently opined that the current downturn is the next best thing to the Great Depression. Another thing is all these computations about future earnings, etc. The last time we had rocket science applied to the financial world, it resulted in a crisis of monumental proportions. I like to keep things simple, if possible. Ben Graham’s lens doesn’t much interest me, but then again I am not a fundamentalist nitpicker at an insurance company. Also, I don’t think all that much of check lists, particularly someone else’s. As to protecting oneself against inflation, what is the chance of inflation occurring in a deflatory depression/serious recession?

  • […] would appear that the nascent rally could have more steam left. (Also read my recent posts “Is the tide turning for stocks” and “Does the stock market rally have […]

  • Frank Wordick

    Addendum to item 9: In an earlier article, co-authored with Albert Edwards, James Montier said he was looking for a market bottom at around 500. Why then is he buying when the S&P500 is closely approaching 900?!!! It must be him helping to drive the market up. It don’t make no sense, does it? Well, one thing that stands out is that Montier is a fundamentalist. He says he doesn’t care much for technical analysis, because it’s not statistical. Others have rejected technical analysis, because they’ve checked it on their computers and found that it doesn’t work. Fundamentalists never get the message that technical analysis is not statistical and that computers can’t do it. And what about the wonders of statistics. In the late 1990’s, Long Term Capital Management did a risk analysis of their bond market positions and came to the conclusion that to be really safe they needed to protect themselves against moves approaching two statistical deviations even tho one statistical deviation assures you that you’re safe. The market then decided to deviate three sigmas, LTCM went bankrupt and nearly brought down the global bond market. More lately, we have the S&P500 deviating 4 sigmas from the 50-day moving average and I believe 6 sigmas from the 200-day moving average. So much for the marvels of statistics. You know what they say: “There are lies, damn lies and statistics.” As for computers doing things, you should know that the biggest supercomputer has a brain capacity about that of a mouse — certainly not more than two mice. In any case, Montier evidently isn’t impressed by the previously announced target of 500, most probably computed by Edwards using technical analysis. Also, Montier cited Grantham to the effect that one is stupid if he doesn’t buy when he can buy. But if I remember correctly, Grantham’s most optimistic market bottom is projected to be something below 800. My own opinion is that the numbers are there for a reason. I don’t think that they are like decorations on a Christmas tree. They mean something. I do my own, when possible. If you don’t abide by your own numbers, where is your discipline? When thinking about all this, remember that these enormous funds are clumsy and unwieldy. They are difficult to maneouvre. They lack the agility of smaller funds like those run by Sedacca. Therefore, I suppose they just do the best they can. Sedacca is buying, using half his assets, but only to punt on this rally. For the longer term he sees it as preferable to sit in Ginnie Maes yielding 6-7%. He says he doesn’t want to lose money for his clients, because it is too hard to win it back. Understand that Sedacca is much smaller than Montier and Grantham and therefore closer to his customers. His relationship is fairly personal. His moves are considered with respect to his clients needs. On the other hand, Montier and Grantham’s concerns are focussed on the operations of their funds. Finally, once I visited the fund manager of a large bank. He told me that investors are always accusing him of not being able to beat the market. He then unequivocably stated: “I am the market!” Think about that for a while.

  • Austin

    You you buy stocks you are buying a business simple as that – you are part owner. If the business isn’t sound neither will the stockholders for very long. Warren Buffet has stated this MANY times. Investing in indexes just leaves you open to problems buy GOOD SOUND BUSINESS FOR A GOOD SOUND price and you won’t have to worry about what the stock market is doing or what the share price is. If it is TRULY a well managed business eventually the share price will reflect it’s intrinsic value.
    investing in the stock market

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