Monday, April 6, 2009
The market is rallying. The S&P 500 is now up 114 points in the last 17 trading sessions... for a total rise of 16%. Astonishing.
And the price strength of the move has all the marks of a massive new trend.
It's true the market has fallen 50% in the past 18 months and valuations are now in "cheap" territory for the first time in years. It's also true sentiment reached an extreme level of panic in March. The AAII investor sentiment survey, for example, reached all-time bearish levels in the first week of March, just before the rally started. We love to be bullish when the crowd is bearish.
Now even some of the market experts I respect are calling for higher stock prices. "You have to be careful not to miss the opportunity," says Mark Mobius. Mark, one of the most famous money managers in the world, sees value in stocks and says we're at the start of a new bull market.
Recently, another institutional heavyweight, Barton Biggs, told Bloomberg he thinks the S&P 500 Index may rally between 30% and 50%.
Even Whitney Tilson – one of the most bearish fund managers of the last few years – has turned bullish. He's loading his fund with financial stocks like American Express and Wells Fargo.
It's hard not to be on the same side as these guys... But the chart is sending us a different message.
In the early 1980s, Jim Fixx was the world's top running trainer. He literally wrote the book on running... called The Complete Book of Running. It sold over 1 million copies and made him rich and famous. His muscular legs were featured on the cover. The picture of health.
A few years later, Fixx dropped dead of a heart attack. He was 52 years old. Turns out, on the inside, Fixx was not so healthy.
Look at this chart of the S&P 500. The price is rising, and it has the appearance of health... But when we look below the skin, there's no multi-month breakout developing. The volume looks sickly, and the momentum is erratic and jerky.
Let's start with the breakout. This index needs to rise through 950 to make a new 65-day high. I studied the initial rallies that followed the great bear-market bottoms of 1929, 1938, 1974, and 1982. If this market was to maintain its ascent to 950, it'd be the strongest, sharpest rise in the history of the stock market... even sharper than the bear-market rally that started in late 1929 after the initial crash.
I think that's unlikely. If this is a new bull market, it's far more probable we'll see the market form a base over the next few months that sets the stage for a breakout later this year.
The market's volume pattern is sickly... Its recent declines have come on huge trading volume... but its recent rallies have come on low volume. This guy is having a heart attack.
The momentum – as shown by the relative strength index (RSI) – is strong right now, but it looks jerky and sudden. I like to see a trend of higher highs and higher lows driving higher slowly but surely.
In sum, it's just too early to call the beginning of a bull market. We don't have enough evidence to be bullish on stocks in general.
On the other hand, oil and copper are breaking out to new highs. And as Jeff pointed out, commodities in general look ready to explode higher. So forget stocks for now... Commodities are a much healthier prospect.
Copper hits a five-month high... up 8% last week.
Smartphone maker Palm up huge from its December bottom... the stock has more than tripled this year.
Unemployment rate jumps to 8.5%... that's a hits 25-year high.