Bull Trap or Legit Rally?by IShortYouNot on November 14th, 2008 at 10:23 am |
(6 votes, average: 4.67 out of 5)
Loading ...Gio made a comment in his article “I Smell A Bull Trap” which got me to thinking. ISYN believes this is not a bull trap and here’s why:
I’m going to fast forward to Phases III and IV, Mania and Blow Off. New Paradigm was the whole “decoupling” belief that the world was no longer attached at the hip to the U.S. economic environment. Plain and simple they were quite wrong as we’re seeing still…. the global economy is slowing down and/or in a recession primarily due to events that began in the US. The subprime crisis hit and all the talking heads came out and said “Fear not! This shall be contained.” Hence the Denial stage as the market sold off and then rebounded Q407-Q108. During this time the majority of professionals began to believe it had been contained and things had returned to somewhat Normalcy following the selloff. The Bull Trap had been set. Then came the Fear as global economics and financial markets began to gain downward momentum on worse data and announcements. Credit markets seized up tighter and then came the Fall of 2008. September, October, and the beginning of November saw absolute Fear and Capitulation as hedge funds went bust or simply shut down to reopen next year. Redemptions ran rampant from mutual funds and hedge funds alike as hundreds of billions of dollars had been pulled out the financial markets for the short term (it’s going to come back in eventually and it’s going to have to chase the bulls up). ISYN believes we’re in the Despair phase as individual investors, 401k participants, wealth managers, hedge fund managers, and mutual fund managers have lost all trust in the markets. This is ESSENTIAL to the bottoming process. The goal is to start accumulating assets when everyone else is simply disgusted with them. Buy low, sell high ring a bell? From my own experiences I’ve been hearing stories of clients who “just don’t want to deal with it anymore” and want to go to cash for six months. They’ve given up. They’ve essentially thrown up their hands and quit for the time being - that is the essence of desperation. When everyone’s been doing the same thing for a relatively long time (whether by time periods or severity) you should do the opposite. This holds especially true in the financial markets.
-ISYN
if you look at the 100 year chart, we are only approaching “fear”.
November 14th, 2008 at 11:24 amDespair would be below 1000
/\ For the Dow!
November 14th, 2008 at 11:24 am2000 was the “new paradigm”, 2002-2008 was the bull trap, after the 2002 lows get taken out it marks fear, and then we go to 1000
November 14th, 2008 at 11:26 amToo long a time frame can be just as poor as too short.
November 14th, 2008 at 11:28 amGood points. But I dont we can have a new bull market without robust credit creation.
The big banks got TARPed $25B each, and since then they’ve lost 30%-60% of their value in less than two months. That’s important because the rapid selloff comes so late in the crisis and AFTER so much monetary and fiscal intervention. While it does have a capitulatory feel to it, the only reason I can imagine why investors would take them down this hard so late in the crisis and after a big injection of capital by the government is they’ve learned about some some new, very nasty shit that needs discounted. I don’t know what the nasty shit is that they’ve suddenly decided to discount over the past few weeks, but I’d bet a hamburger that whatever it is will cause the banks to keep their sphincters tight and continue to restrain lending.
Also, per the Merrill Lynch High Yield index, option adjusted high yield credit sreads are an unbelievably high +1600. While down a few basis points from their all time highs this past October, they are way wider than the previous peaks of about +1100 that were reached during the 1990 LBO bust and the tech bust equity low in Oct. ‘02. So, the point is that at +1600, the high yield new issuance market is effecitvely closed and will remain closed until spreads tighten to levels where it is economically viable for issuers to come to market. That won’t happen until actual defaults spike and begin to approach levels implied by current pricing in the high yield market.
The bottom line is that IMO, you can’t get a new bull without robust credit creation and the action in the banks and the high yield new issuance market suggest to me that is still many months away. We may have a decent rally for a few weeks or even a couple of months after today’s round of profit taking, but I’d bet a cheeseburger we make another trip down to at least test the lows again.
Sorry for the long post.
November 14th, 2008 at 11:37 amHey, glad you analyzed this chart. You did a good job in attaching recent trader psychology to this chart and I’m certainly with you on red october. However, Given that the bull rally from 2003-2007 was so huge, I think you have to extend the “mania phase” of this chart, and therefore extend the blow off phase, in particular the denial and fear stages. but i gotta admit, a lot of stocks out there are amazingly emulating this famous chart (see HANS, GRMN, CROCS, VMW, too many). maybe when the old leaders like AAPL, GOOG, and CME hit capitulation then we will be further down the blow off phase.
November 14th, 2008 at 11:39 amSmallDog and Gio,
Solid points and well taken.
SmallDog (yes I’m too lazy to type your stated name even though I’m selectively lazy and willing to type out this entire sentence explaining it), you’re correct on the credit markets. They are the economy’s blood and without blood the body stops working/growing. However there has been such massive global stimulus (blood transfusions) that I suspect while it may take a little bit of time to flood the global economy (veins) with this blood, it is certainly making its way through the system, albeit at a trickle a minute. Odds of us retesting after the new year? Pretty good, but in terms of a several week to several month rally I’m convinced. Especially since it’s the inflection points where the most efficient money is made and everyone I speak to or know of that doesn’t daytrade is terrified and sick and tired of this market - they’ve all but given up and many have given up.
Gio - I view the chart as emotionally proportional regardless of size and scope of various Phases. It’s not drawn to scale but rather represents sentiment flows over time that follow that pattern whether it be a very short term thing (think of Crocs or any other fad) or the longer term stock market. As such I base my views of our progress along the curve on the emotional flows in the market and not on relative time or nominal changes in value. It’s as subjective as it gets but that’s the beauty of inefficient markets - if you figure out the change in sentiment before others you’ll recognize the benefit of their chasing to catch up. I measure the flows based on personal anecdotes in everyday life. Hope that made some kind of sense.
November 14th, 2008 at 11:55 am