Wednesday, January 30, 2008

Rally time?

Put your rally caps on. Despite a growing sense among investors that US stocks have entered a bear market, some traders and speculators are expecting an intermediate term rally.

No sooner had I posted the article, "Yeah, it's a bear market" to Safehaven.com, than Steve Saville came right in with an article entitled, "A stock market bottom". And since Steve has been keeping a keen eye on the internals of the market, let's hear what he has to say.

To briefly summarize, Saville is looking at the possibility of a near-term stock market bottom. He bases his call on the recent preponderance of new lows on the NYSE and the expectation that a recent selling climax should pave the way for a five month-long rally.

Still, he points out that any expected rally will take place within the context of a secular bear market, and he stresses the importance of measuring market performance in real terms.

"As an aside, for the past seven years we've consistently maintained that US equities are mired in a secular bear market as defined by long-term downward trends in VALUATIONS (P/E ratios, etc.) and REAL prices (gold-denominated prices). In a high-inflation world it is very important to define the long-term trend in this way, rather than in terms of nominal dollar prices, because it is purchasing power and not monetary value that matters.

For example, if the US stock market were rising at 5% per year while the US$ were losing purchasing power at the rate of 10% per year then it would not, in our opinion, be reasonable to claim that US stocks were in a bull market. What we would have, in that situation, is a bear market in the dollar as opposed to a bull market in equities."

So Steve's longer-term view on the market is very much in line with that of Dow Theory Letters writer Richard Russell, who stresses the importance of valuations when sizing up the stock market.

Also, his comment on measuring market performance in terms of gold recalls the views of Marc Faber and Jim Dines, who remind investors to view market performance in real (inflation-adjusted) terms.

Now let's jump over to Frank Barbera's recent Financial Sense Market Wrap Up for another look at market conditions ahead of the Fed's meeting today.

In, "All eyes on the Fed", Frank summarizes the recent market action and notes the possibility for an upcoming Fed-induced rally.

While he feels that market action has become increasingly bearish, he sees a setup for a relief rally, provided the Fed comes through with a hoped-for 50 basis point cut in interest rates following Wednesday's meeting.

"Be aware that over the last few weeks, the steady downtrend in stock prices world wide is strong confirmation that a bear market, possibly a bear market of epic proportions, has taken control. For months this column has warned readers of precisely this outcome, and only now, with prices badly battered do we see the first real hope for a recovery rally.

That said, we are under no false illusions. The current tenuous lease on life courtesy of technical oversold readings is highly dependent on additional help from monetary policy. If the Federal Reserve does not cut interest rates by at least .50 basis points tomorrow, then the disappointment will reign supreme, and stock prices are likely to get very ugly once again."


So now you're up to date. Check out both articles for more, and recognize any upcoming rally for what it is really is. At this point we are looking at the possibility of a several months-long relief rally within a longer-term bear market. Don't get caught up in the hype.