Richard Russell (Dow Theory Letters): Are we in a bear market rally or a new bull market?
“(1) The market turned up in a V-shaped reversal off the March 9 low. However, almost all bull markets start with a period of accumulation. This entails a sideways move, sometimes taking weeks or even months. Or it may require a non-confirmation of the Averages as per December 1974. At the March low, we saw neither - no indication of accumulation. And that bothers me.
“(2) At the March lows, we did not see the ‘great values’ that usually accompany major bear market bottoms (i.e. P/E’s in the 5-8 area, average dividend yields of 5-6%).
“(3) The market was severely oversold at the March lows, a condition that often sets off a ‘relief’ (‘let off the pressure’) rally. The advance was probably triggered by the severely oversold condition of the market.
“(4) The one thing a money-manager cannot afford to do is be on the sidelines during ‘what could be’ a major rally. Once the market started up from the March 9 low, many money managers leaped in. The big short positions were immediately squeezed. The rise became a momentum advance. Retail buyers moved in, many trying to retrieve some of their brutal losses.
“(5) The rally moved up ‘too fast’ - action more typical of a bear market rally than the slow, plodding rise that is characteristic of the advance in a new bull market.
“(6) Two groups that led the rally were Financials and Consumer Cyclicals. Interestingly, these two groups contained respectively 5 billion and 2.7 billion shares sold short. This suggests strongly that a significant part of the rally was fired up by short-covering in these two groups (thanks Alan Abelson for this information).
“(7) Many investors and analysts turned optimistic after the market had rallied for only a few weeks. At true bear market bottoms, investors remain stubbornly sceptical or bearish for months after the bottom. Remembering 1974, people were actually angry when I turned bullish at the bottom. I was receiving hate letters and subscription cancellations.
“All of the above have kept me skeptical and cautious about this rally.”
Source: Richard Russell, The Dow Theory Letters, April 20, 2009.
See this link for the stock market in the great depression. It just illustrates that a rally can go on for many months before resuming the longer term trend.
http://2.bp.blogspot.com/_r_4bas-lh...Hg/nwwjsjvbVWM/s1600-h/29to32percentchart.PNG
From the article: "The bank's revisions are based on a domestic economy that has weathered the global recession better than policy makers expected and confidence that the rebounds in the United States and China are about to give a lift to exporters and commodity prices." They are at least right abuot China. The BOC is declaring the recession over just based on their forecast so we'll see how it plays out soon.
In any case, my investments are still based on the USD going down and gold going up.
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