Nearing the end of the current bear market rally, BUT….

Copied from my Motley Fool Blog:

It’s been a while since I wrote a long post on my thoughts on the market out here.

--------------------------------- Background
When this whole rally started in the 600’s I bought in with both feet. I loaded up on Citigroup, UYG, GE, SSO, Alcoa, TAN, DXO and I sold all my gold and silver miners near the peak after the Fed announcement of Quantitative Easing at GDX = $38 a share.. I even put 100% of my 401K in the market near the lows.

Well I finally have gotten rid of all my longs except for a few I sold in the money covered calls on for April that will probably get called away from me.
I even have dipped my toe into shorting the last few days but I have kept it VERY small and actually have been stopped out for now as the “animal spirits” are really in the equity markets right now.

That being said we are nearing the end of this bear market rally. I am not smart enough to tell you if it is today at 856 on the S&P. I am always early on predicting market moves and luckily I have adjusted my trading to fit my “always early” timing.

For instance I was finally getting bullish on this market again when it broke 750 to the downside on February 22nd when I posted:

“You want to see what irrational panic looks like, look no farther than today.”
http://caps.fool.com/Blogs/ViewPost.aspx?bpid=149024&t=01001808419327792238 2/22/09

But I noted in my post that I was just STARTING to nibble on long side candidates when I said..

“I am FINALLY adding some NON-gold related longs to my real account.”

This is the number one lesson trading these markets has taught me, you are never going to catch the exact top or the exact bottom. I started buying things at 750, bought all the way down to 666 and started selling above 830…

I have made great profits this year and am not as concerned with making all the money that will be made on the downside as shorting is stressful and dealing with Ultrashorts or put options is like juggling chainsaws…. Look the single day, 50% loss in FAZ Thursday for a good example. I shorted Lehman Brothers the whole way down with puts in 2008 and I believe I took 3 years off my life doing so. :)

--------------------------------- The BUT….
There is a reason I have a “but…” in the title of this post…. The reason is although this may be another bear market rally, 666 on the S&P could have been the REAL low.
But to me that does not really matter, in my opinion even if it was the REAL low we are NOT just going to go straight up off of a V bottom like what is happening right now. We are up 28.5% from the lows in exactly 1 month’s time. A 28.5%, 1 month rally is NOT the way a market bottoms. So selling here makes sense if you believe 666 was the ultimate bottom OR you believe the real bottom is lower.

Arguing if that was really the low or not matters very little as it is 30% away from where we are now. Do you want to hold even if we only retrace half of the rally? (15% decline) I know for sure I do not.

--------------------------------- The Reasons….
Anyway, if you want more proof that we are due for a pullback of some sort, or maybe something more sinister (like new lows) I will offer up some proof from a technical perspective and from others. Really I probably should have just limited my post to this info.

1. The “dumb money index” at http://www.sentimentrader.com/ has swung to positive in the short run AND the long run.. First time this has happened since September 2008.

2. Corporate Bond spreads, although off the all time record levels of January 2009 have not improved substantially and are still sitting at levels that would have been unthinkable in 2008.

3. This chart, which needs no explanation. (C-RSI over the last 8 years)
http://www.stocktiming.com/Tuesday-DailyMarketUpdate.htm

4. Mutual fund inflow finally have started to surge. Trimtabs reported 11.9 billion in Mutual fund inflows last week. The previous week there was only 3 billion of inflows and that had been the trend through much of March. Mutual fund money is “the dumbest of the dumb money” and you always see a surge of mutual fund money coming in when the market tops.

5. At the same time Equity ETF’s had outflows for the second consecutive week. So pro traders are selling to mom and pop mutual fund holder.

6. A great deal of credit indexes are STILL HITTING NEW LOWS. The ABX indexes all put in new lows. What about the Public Private Purchase program? :) The CMBX spreads are still above the levels where they BLEW OUT in November 2008. Triple A CMBX spreads are at 600 basis points and they were at 200 during the stock market crash in October. So right now CMBX spreads are 3 times worse than October 2008 and ABX prices are at their worst levels ever. Yet the market continues to rally.

5. Although unemployment is a lagging indicator it is surging at an increasing and mind-boggling rate.
https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg35EYd0kRByWIt7YAX8IPRMmjj1C5lHzDg2wy3Me6K3Mg4WZ75QUTyRwnNRQnk-2EaIhsCkJMMkFicJi5sQTA0jlFbTJJre2VDnLQXpYlOe7oAiTq7WYMM3S5F2mBCxgtC5lrwJdVBofhx/s1600-h/Unemployment+Rate-2009-03.png

6. The bottom at 666 had no capitulation associated with it.
“in January 2008, when the S&Ps were in the early stages of what was to become a devastating collapse, domestic equity mutual funds were worth about $6.5 trillion. Lo, a little more than a year later, in February 2009, we see that the value of these funds had fallen by about 48%, to $3.4 trillion. But guess what: Over that time, net redemptions totaled only 2%, or about $100 billion! What that means, explicitly, is that mutual fund investors have stuck with this bear market throughout the decline.” Rick Ackerman from www.rickackerman.com One of the best investors I read.

7. The trailing P/E of the market is 100… you won’t find that stat on CNBC.

8. World trade has fallen off a cliff and has not recovered during this market rally. The Drybulk index has been down 21 of the last 22 days yet the market has rallied this whole period. Here is a graphical picture of world trade.
http://www.advisorperspectives.com/commentaries/images/jm021309image001_0F6C5DDE.gif

9. The big money was DUMPING hardcore into the financial run up on Thursday.
http://online.wsj.com/mdc/public/page/2_3022-mflppg-moneyflow.html?mod=mdc_leader

10. Jim Cramer called the bottom for the 10,000 time at 856 on Thursday.. (29% off the lows) Also he is still on TV and I have always said I believe the real bottom comes when his show gets pulled because no Cramericans have any money left.

I think that is enough for now. Something I realize is FACTS ARE NOT SHORT TERM TRADING INDICATORS but they should still be kept in mind when trying to determine the longer-term picture. For instance some REITS are paying their dividends by issuing more stock which is the “ponziest” thing I have ever heard, but that being said SRS which shorts REITS was down 24% on Thursday.

One thing I learned from 2007 is being right on the macro level is not the same as being right trading the markets. Still all these things are to be kept in mind as eventually FACTS MATTER.

Thanks for reading this extra long post. Please rec and comment.

PS: Quote of the day: “Buying our own treasuries: Paying other people interest to loan ourselves money we don't have.”