Untrustworthy Bear Market Rallies
We saw a strong market last week so we are being asked if we truly are in a bear market. It is not uncommon to have small rallies in bear markets. Throughout the 2008 year we saw 51, 20, and 34 day market rallies. We all know what happened after that. We don’t want to get emotional about this two week rally we are in right now. We are not saying we are going into a recession from this bear market. We have seen a bear market rally in the past bring people into the market and then the claw of the bear comes through and takes them back out.
These rallies are not fundamentally driven
As we watch these short bear market rallies occurring our technical indicators are showing us that the top 20% of short selling stocks are providing the most upside in these market rallies. Since February 11, these top short selling stocks are up 27%. That’s because people are selling the stock before they own it and then having to buy it back because of the rally. This shows that these rallies are not fundamentally driven. It’s people covering their tails. Also, the volume of trading on up days is much lower than on down days. That tells us that these market rallies are not institutionally supported.
A mixed jobs report
The jobs report’s numbers came in better than expected but if you dig, you will see that there was negative mixed in with the good. The hours worked and wages were down. We are not seeing the wage inflation the Fed was looking for. We believe the Fed will hold off raising interest rates in March but it could still happen in June.
Big European Central Bank meeting
On Thursday we could see some major stimulus coming from the ECB (European Central Bank) meeting. Mario Draggi is under a lot of pressure from a previous round of stimulus not doing well. There is also pressure from the growth inflation issue. We believe they will do a lot more sovereign debt buying. Depending on what they do, it could cause a lot of volatility in our markets.
Opportunities in a bear market
We still believe we are in a bear market and that you need to be very cautious. We are doing that with our conservative approach. In a bear market there are opportunities but you have to be patient and wait as we are.
Keep sending us your comments and questions.
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