As stocks rise, volume has been trending lighter. You can see the trends in volume declining from the March lows.
In fact, according to Bloomberg, S&P 500 volume for July is turning out to be one of the lowest volume months this decade. This follows volume that was far below average in June.
Markets can, of course, rise on lighter volume. Markets can do anything they want. However, if volume is the oxygen of the bull, the market may soon be running short of breath.
The S&P 500 rose 17 points today, closing at 850, retracing about half the decline from yesterday.
Volume picked up, with the NYSE Composite trading 7.2 billion shares compared to Monday’s 6.85 billion shares. Volume has averaged about 6.7 billion shares since the beginning of February.
Breadth was 5:1 to the upside. Yesterday, breadth was 27:1 on the downside as the button-pushers did their thing.
We continue to be in an upward sloping trading channel. The indices touched on the lower band this morning and immediately bounced. Nothing has changed over the past few trading days.
The VIX closed at 37, recouping 40% of the rise yesterday. It is in a downward sloping channel. The rise in the index yesterday did not change that.
There is something different about this rally. Stocks are going up on bad news. Today, Caterpillar and AK Steel were both up off lousy earnings.
This has been going on for awhile. Last week, Ingersoll-Rand pre-announced a bad quarter and went up. Likewise, REITs that have been able to float stock – such as Kimco, whose offering last week was oversubscribed and closed up a point and a half on the day of the issuance – have bounced hard off the news.
Have you seen Apple and Google lately? Both look like they have put in a definitive bottom.
I am of the opinion that this is a bear market rally. But who does not believe that? Virtually everyone whom I speak with and almost every article I read doubts this rally. Even I do.
The rally could go on for awhile, though I remain open-minded that we may be topping. We are very overbought, and I am watching closely to see evidence that the market is rolling over so I can dump my ETFs.
However, the skepticism so many people have regarding the sustainability of this rally makes me think we could go significantly higher.
Some random thoughts.
Today, the S&P 500 was down 4.6%. Since the peak on October 11, 2007, the S&P 500 is down 56%. It is also down
We are deeply oversold.
But who cares? The market can do nothing but go down.
Why? From the rumor department
Markets can and will do anything. They can and will go further than you or I could ever imagine.
Of course, at extremes, the predictions get more and more wild.
I remember being in a meeting in March of 2000 when a well-known money manager said to me that technology was going to get to 67% of the S&P 500 within the next few years. Tech was 35% at the time. I just shook my head.
Likewise, we are getting more and more extreme as the market goes lower. Today, one bulge-bracket (are there any left? - ed.) technician speculated the S&P 500 could get to 280, which would retrace the 1929-1932 decline. (More on that in a minute)
Remember, the uber-bears will overplay their hand!
Rare was the uber-bull during the tech boom who got you out at the top. I imagine (most of) the uber-bears will fail to get you in, or cover your shorts, at the bottom.
Now, could the market fall 87%? Of course it could! Markets can and will do anything.
Is it likely?
No. Not impossible, but unlikely.
I do not invest nor trade based on extreme events. I believe that it is prudent to scale into and out of positions as the market approaches extremes on both the upside and the downside. Thus, I usually take a hit when I am buying and leave money on the table when I am selling.
And I certainly have been taking a hit the past few months. I have some cash left, but not much.
I cannot help myself. Stocks are becoming mouth-wateringly attractive!
Ignore those arguing that stocks are expensive because GAAP earnings on the S&P 500 are going to be $25 in 2008 and expected to be $32 in 2009. That is foolish. Roughly $30 in the decline in earnings is due to the massive write-offs in the financial sector. To say that this is an accurate reflection of the underlying profitability of corporate America is to believe that we are going to have $1 trillion in financial asset write-offs each year for the next 10 years. Even the uber-bears are not arguing that.
Instead, the market is trading at 10x normalized earnings.
Don't believe me? Fine. But get this - the median stock in the S&P 500 is trading at 9.2x 2008 earnings and 9.9x 2009 estimates. It is even lower in the ValueLine universe.
Over a 10 year period, I cannot think of a time when investors have lost money when the median stock was valued at less than 10x earnings, even during the Depression.
Now, back to the Depression. The technician mentioned above speculated that stocks would fall to 280 if the market fell as much as it did to the 1932 bottom. Absolute return is the wrong metric, in my opinion. Most likely, the bottom will be a Tobin's Q of 0.3, which marked the great bottoms of 1921, 1932, 1949 and 1982, as detailed in the excellent book, Anatomy of the Bear, which I will review in a few days.
According to Russell Napier, author of Anatomy of the Bear, a Tobin's Q of 0.3 would take us to around 400 on the S&P 500. And what happened after the market bottomed in 1932? Equities rose 180% in a year, and 240% within four years. Such moves off 400 would put the S&P at 1120 and 1360 respectively.
Which is why I feel comfortable buying stocks here. In fact, the further markets fall, the more comfortable I become.
Of course, markets may not behave the same as they did in the 1930s. However, there is a tremendous amount of cash on the sidelines. On Larry Kudlow this evening, Blackrock's Bob Doll stated that cash was 50% of retail investors' portfolios, an all-time high, which is consistent with what I have seen. Thus, there is a lot of firepower on the sidelines which could probably will slingshot the market higher once it bottoms.
In fact, even though stocks fell 87% during the Great Depression, the real decline was less, somewhere around 70%. (I do not have the inflation data in front of me at the moment, but I will hunt it down and post the inflation-adjusted returns of stocks during the Depression at another time.)
To date, the inflation-adjusted return of the market from the peak in 2000 is 62%, almost equaling the real decline in stocks during the Great Depression!
Deflation during the Great Depression was about 20%. (Again, I'm doing this by memory on the fly. I will get the actual numbers later.) During the Depression, the government did little to fight deflation, a very different response from the government today, however ham-handed they may be. In fact, the government actively created deflation during the Depression by raising the discount rate from 1.5% to 3.5% to stem an outflow of gold in 1931. I do not believe deflation will be anywhere near what occurred during the Depression, given the actions of the government, and that the monetary creation over the past decade primarily effected asset markets, not consumer prices. And now, deflation is manifesting primarily in the asset markets, not in consumer prices, as one would expect.
Thus, a 70% inflation-adjusted bear market would get us to 560, another 20% decline from here. Heck, at the current rate, we will be there by the middle of next week!
If we are going there, get it over with, I say. The sooner the better. Let's fall 20% tomorrow!
On a closing note, I want to give full props to one of Running of the Bulls' regular readers, Dave. (Dave goes by the handle psychodave, but his comments are anything but psycho.) A while back, Dave said the S&P 500 was going to 600. Well, it has not yet gotten to 600, and it may not, but the SP traded with a 6-handle on it today, and that is close enough for me.
Good call Dave!
After news of a possible investment in Citigroup by the federal government spiked the market higher on the open, investors immediately hit the bid and ground the market lower throughout the day.
The selling was relentless as stocks were given little time to breath. All day, the sell orders overwhelmed the market as buyers stepped aside. Stocks tried to rally around 2pm but were banged down into the close.
Today had the feel of a program methodically swamping the market with sell orders. Someone is liquidating, and wants or needs out now.
The general tone is one of exhaustion and exasperation. People are generally worn out and resigned to the bear mauling. Several investors whom I spoke with today said they just wanted to chuck it all aside and walk away. The negativity is pervasive and overwhelming.
The S&P 500 is sitting right on support.
As is the New York Composite
The Nasdaq is still above support.
While the Industrials have broken through and hit new lows.
About the only good news is that this sell-off is occurring on lower volume than the sell-offs in October and November.
I am amazed that the action has been so horrible. I am not surprised that the market has fallen - remember, Running of the Bulls was short going into the sell-off. However, historically, bear markets are usually accompanied by violent bear market rallies.
For example, there were 40%-50% gains off near-term bottoms in stocks after the collapse of the tech bubble in 2000-2002. Even after the market crash in 1929, stocks rallied nearly 50% into 1930. But though stocks have undergone one of the most brutal sell-offs ever, such a rally has yet to occur.
I still believe that a significant bear market rally is coming. Whether the market will bounce off 740 on the S&P 500 or 540 however, I have no idea. I keep thinking a rally will happen soon, given the unremitting negativity I am hearing, but I thought the same thing two weeks ago when the market was 15% higher.
Feels like 1999, only in reverse, doesn’t it?
Don’t remember 1999? That was when all news was good news, when stocks could only go up, when valuations didn’t matter, when technology stocks and big cap growth stocks would rule the world, when we hung on the words of Pollyannas and “gurus” expounding the Brave New World that lay in front of us.
How different it is today. Now, the uber-bears are venerated at Davos. Seers clamor over each other to up their predictions of imminent disaster. “$1 trillion in write-downs!” “No, $2 trillion in write-downs!” “I say $3 trillion in write-downs!” $10 trillion! That’s right $10 trillion!”
Reminds of a mere year ago when the prognosticators were scrambling to out-top each other on the upside for oil. $150! $175! $200! $350!
Was it really only eight or nine months ago that this blog was pleading with investors not to lose their minds on potash and coal stocks, that prices were unsustainable?
Remember the euro? The euro was going to $2, or maybe $3. I was in Europe a year ago, watching the dollar lose a penny a day to the euro. Remember that? I sure did. It was taking a nice chunk out of my wallet. Today, the euro is in a death spiral.
And so are stocks. The panic would almost be amusing if I didn’t know so people getting hurt by it.
Volume was actually quite light today, with NYSE Composite volume at 5.4 billion, as many investors are out of the office on vacation with their kids this week. Since the collapse began in September, of the 18 days when the S&P 500 has fallen by 4% of more, this was the second lightest trading day, 19% below the average.
It may be that the selling is exhausting itself.
Today, stocks are as cheap as they have been in generations. Yet, stocks are toxic. The day traders and bearish hedge funds rule as they press hard, knowing that the government is impotent, that investors are paralyzed, and there is nothing to stop them. All the while, they are setting up tremendous opportunities for anyone who can see beyond their nose.
Where is the market going to bottom? I have no idea. But the cheaper stocks become, the less I care about technicals. So I will continue to buy, scaling in as the market gets even more attractive.
