Anticipating A Possibly Sharp 3- To 6-Week Stock Market Rally

By Bill Cara on March 24, 2009 | More Posts By Bill Cara | Author's Website

TAP, TAP, TAP… BOOM! Many of us saw it coming. Whether or not the capital market has been a legitimate price discovery system for the past year or two is not the issue - we have long argued that the market system has failed and needs to be restructured from the ground up - yesterday’s (Monday) explosion in share prices was expected and did serve as welcomed relief. How long the rally continues is a matter of international debate.

In New York at the close on Monday (compared to the two prior Friday’s closes in brackets), the DJIA (^DJI)(+497.48 +6.86% to 7775.9) [(7278.38) (7223.98)]; S&P 500 (^GSPC) (+54.38 +7.08% to 822.92) [(768.54) (756.55)]; and NASDAQ (^IXIC) (+98.50 +6.76% to 1555.77) [(1457.27) (1431.50)] had a remarkable bounce from previously range-bound levels.

The Toronto Composite (+452.16 +5.32% to 8958.51), and Venture Board (+22.23 +2.47%to 924.03) were also stronger, falling in line with the global rally.

The US equity market had winners in every DJIA component stock, in every sector and every industry group. The best performing sector, Financials (XLF +16.4%), was far ahead of any other. Energy (XLE +8.2%) and Industrials (XLI +7.3%) were next strongest. The laggard was Healthcare (XLV +3.7%).

Among the industry groups, the Banks ($BKX +18.6%), REITs ($DJR +17.0%) and Broker-Dealers ($XBD +14.3%) were the leaders. On Friday, the REITs (-8.5%) and Banks (-5.0%) had sent the market south.

Among the 98 Cara 100 stocks that lifted yesterday, the leaders were all banks: India’s HDFC (HDB +23.4%) and ICICI (IBN +15.9%), South Korea’s Kookmin Bank (KB +18.1%) and Germany’s Deutsche Bank (DB +16.7%). Next best was Canadian miner Teck Corp (TCK +15.1% to US$5.40). Suncor, following a proposed merger with PetroCan (SU -1.8%) lost a bit and Silver Wheaton (SLW -0.1%) was almost flat.

Corporate news, other than a few takeover deals, has largely melted into the background as the focus is on politician and central bankers at this point.

Treasury bonds dipped sharply ($USB -1.80% to 128.61) as yields rallied. The yields on the 30-, 10-, and 5-year Treasury bonds and notes also lifted to 3.693, 2.660, and 1.681, respectively.

In Saturday’s Report, I opined that with respect to Wednesday’s FOMC announcement

…the impact ought to be lower mortgage rates, which will allow Americans to re-finance with some comfort, taking pressure off the foreclosure problem, which helps the banks, making their assets less toxic. Of course, Tim Geithner is now going to say that traders will get more govt help in buying those toxic assets, so I am guessing that the buyers of those subsized and less-toxic assets will be DC and Wall Street insiders and wealthy investors… But, at least, once this fire as been put out, the equity market will soar. Equity prices at this point have little to do with corporate earnings, or the macro-economic data that economists like Nouriel Roubini have been hammering into your head, and, in my view, they certainly are not going to crash -30% from here as Roubini seems to be shouting daily from his soapbox on financial entertainment TV. Once the toxic assets have been rendered atoxic, the credit default swap insurance problem that is presently sinking the global financial system soon becomes an historical footnote. Life returns to normal - with a few new realities anyway: (i) US Treasury paper and the USD are garbage -gold is the new money, (ii) it will be many years before Americans again trust their politicians or their bankers, and (iii) Beijing now calls the shots in the political power structure of the world because they are now America’s banker as the Fed ipso facto, like Fannie Mae and Freddie Mac, has become an agency of Treasury.

After the Sunday meeting between Mr. Geithner and Wall Street insiders, there was widespread agreement that (i) Geithner gave an impressive performance, and (ii) the TAP might actually work. So, I started yesterday morning’s dialog with, “TAP, TAP, TAP… BOOM! You must be deaf if you don’t hear the opening shots of the next Bull phase of the equity markets…” Remember that markets never go straight up, and the maximum amplitude from market high to low in the short-term cycles has been measured in (a few short) days recently, so this rally may carry on for maybe another 5 or 6 percent before reversing to test the new support that presumably exists.

Back to the facts: the US Dollar dropped as expected ($USD -0.63% to 83.30), down from 89.17 at the close exactly two weeks ago. The Yen (-1.04% to 103.12) also dropped, which helped the Japanese exporters, like the auto manufacturers. The other major currencies all closed higher: Euro +0.38% to 136.34, Cdn Loonie +1.39% to 81.73, and the Pound +1.05% to 145.75. The Aussie Dollar soared +2.77%.

Oil prices ($WTIC +$1.78/bbl to 53.85) closed much higher, as did many commodities. Gold now (finally) being viewed as money, pulled back -$12.80/oz as traders took off hedge trades as they chased the broad market higher. This weekend move in Washington re the TAP had been seen coming. After a huge rally on Thursday, $GOLD closed Friday down -$6.52/oz from the Thursday close of 958.86.

Precious metal spot prices at 7:38am ET today for gold, palladium, platinum and silver were (compared to Friday’s close in brackets) at: 931.15 (951.90); 206 (205); 1118 (1105); and 13.53 (13.73), showing mixed prices. Platinum and palladium act actually higher.

Earlier in the day today, Asia-Pacific equity markets closed higher, especially Tokyo (+3.32% to 8488.3) and Hong Kong (+3.44% to 13910.3). Shanghai (+0.56% to 2338.4), Australia (+0.98% to 3517.3), and India (+0.50% to 9471.0) were also higher.

In Europe at 7:42am ET, the French CAC (+0.41%), German DAX (+0.41%) and UK FTSE (-1.00%) were mixed as France and Germany reversed the early selling.

DJIA equity futures were down -50 to 7662 at 7:42am as well, and the market seems prepared to accommodate those traders who don’t think the rally can endure at this point. The USD futures were a tad higher at 84.29 and the Euro a bit weaker at 135.33. Crude oil futures had softened a bit to 53.04, which was still higher than yesterday morning at this time.

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Markets round the world cheered the coordinated action by the Fed, Treasury, and FDIC to absorb and remove toxic assets off the books of major commercial banks, creating public and private sector partnerships to invest in existing assets. Banks absolutely hit the cover off the ball (KBE + 18.6%), providing the lubricant for the massive high-octane, high-volume rally (S&P +7.1%).

Over the next few days and possibly weeks, performance anxiety is going to haunt under-invested money managers, an entirely new “fear” that will engulf Wall Street. The S&P has regained the 50-day moving average and now has its sights initially on the 89-day MA at 825, ultimately on prior resistance at 855.

Hopefully, you heeded our calls to accumulate favorite stocks (or write puts) as the market sold off earlier this month. Resist the urge to chase rallies, using the inevitable early morning sell-offs to purchase stocks at short-term support. Having caught bull fever, we prefer buying pullbacks to the 8 and 20 period exponential moving averages, using prior swing lows as stop-outs on these higher risk trades.

As long as stops are prudently placed, now is the time to assume adopt a higher-risk profile, looking for possibly a sharp 3- to 6-week rally, fueled by overly bearish, under-invested money managers. Once the initial surge subsides, higher price projections will be given. For the time being, however, don’t worry about targets. Concentrate on stocks with good fundamentals-leaders in their industries, with serviceable debt levels, expanding margins, acceptable future growth prospects - coupled with superior technicals - and swing charts with a pattern of higher highs and lows. We are looking for significant accumulation by institutional investors (high volume on up-days, reduced volume on down-days), holding upwardly sloping short-term moving averages, overcoming prior chart and Fibonacci resistance, and the ability to overcome early morning weakness (ideally on negative news), while finishing the session higher on the day.

The PowerShares QQQ (QQQQ) never confirmed new March lows in the S&P, a positive divergence, arguing for technology out-performance going forward. Accordingly, we adopted an over-weighting in technology, adding to our existing portfolio, new positions in: Google (GOOG + 5.28%), Apple (AAPL + 5.39%), SanDisk (SNDK + 10.84%), Qualcomm (QCOM + 4.75%), Texas Instruments (TXN + 7.79%), Cognizant (CTSH + 4.53%), and Broadcom (BRCM + 10.72%).

Stocks rarely move in straight line up or down. For bullishly inclined traders, prudent risk taking will be rewarded, but blindly chasing extended stocks will be a recipe for disaster.

Let’s enjoy the ride, at least for a few days more, but hopefully for the 3- to 6-week span.

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