- Market Stalls, Is The Bear Market Rally Over?
- MacroView: This Time Might Be Different
- Financial Planning Corner: Top Planning Questions Answered
- Sector & Market Analysis
- 401k Plan Manager
Market Stalls, Is The Bear Market Rally Over?
Market rally stalls at resistance, is the “bear market rally over?”
That’s the question we have been discussing over the last few weeks. So far, most of it has played out exactly as expected by turning previous “selling panic” into a “buying rush,” and convincing a vast majority of investors the “bull market is back.”
I get it. The market has rallied 27% from its lows after falling by 35%. From sheer “panic” to unadulterated “exuberance” in four weeks. However, investors are still down 12% for the year.
The Revenant
As we discussed in “The Revenant,” this is what you should have expected:
“Bob Farrell, a legendary investor, is famous for his 10-Investment Rules to follow. Rule #8 states:
Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend
- Bear markets often START with a sharp and swift decline.
- After this decline, there is an oversold bounce that retraces a portion of that decline.
- The longer-term decline then continues, at a slower and more grinding pace, as the fundamentals deteriorate.
Dow Theory also suggests that bear markets consist of three down legs with reflexive rebounds in between.”
As would be expected, the “Phase 1” sell-off was brutal and set up the “reflexive bounce.”
“For many individuals, they will ‘feel like’ they are ‘safe.’ Such is how ‘bear market rallies’ lure investors back in just before they are mauled again in ‘Phase 3.’” – March 14th.
Note the date, which was well before the March 23rd lows.
A month later, and I am overwhelmed with emails telling me the “bull market is back.”
Maybe, it is.
But I tend to agree with Victor Adair of Polar Trading on this point:
“Massive monetary and fiscal stimulus in March and April will ‘counter’ the deflationary surge to some extent, but it’s not a one-for-one ‘offset.’ The deflationary impulse will continue and will be pervasive and enduring. While equity speculators have been BTD lately, the bond market, commodities, and FX have been skeptical.
I agree with folks who say that the Fed kept monetary policy way too easy for way too long. It encouraged way too much leverage everywhere. Now leverage is being punished, and the Fed is riding to the rescue. I guess that leverage keeps getting punished, and reduced, despite the Fed’s best efforts.
We’ve seen a bear market rally in the major stock indices since the March 23rd lows. However, the economic damage is underestimated at this point, and as it becomes more evident we will see a test of the lows.”
Short-Term Overbought
Regardless, in the short-term, the markets remain incredibly overbought and extended after the run from the lows. As noted last week:
“On a very short-term basis, the previous ‘deep oversold’ condition that provided the ‘fuel’ for the rally has been reversed. Also, all primary ‘overbought/sold’ indicators are now fully extended into overbought territory.”
The rally has run into key downtrend resistance, and remains close to triggering a short-term “sell signal” from overbought levels.
If the markets can rally more on Monday and break above the downtrend, the 61.8% retracement level becomes a viable target. Above that resides the 200-day moving average. Both levels are going to provide formidable resistance to a move higher.
Such is particularly the case considering the avalanche of exceedingly negative data coming over the next several weeks from earnings to economics.