Monday, June 1, 2009

The Strangest Rally of All Time

It would be difficult, if not impossible, to describe the absurdity of the current rally in equities in terms that would do it justice. Mere mortals stand in awe of the magnificence, the enormity, and the one-sidedness of the US stock markets since March 9, 2009, until today... and probably beyond.

To try to offer some perspective, the S&P 500 closed today at 94xx, from the March 9 low of 676.53. That is a gain of 39.6% over a span of 57 sessions - 33 up, 24 down. Obviously, the days in which the index recorded gains, those were far superior in size than the days with losses. How well this has been orchestrated would make celebrated composer Leonard Bernstein blush.

Today's gains marked the 12th time during this span that the S&P has been up more than 20 points. By contrast, the index declined by that amount or more only 4 times through the same period. There has been no pullback or correction, as is almost always the case in rallies, no matter what the conditions or the degree of positive sentiment. This rally, unlike all others, has been nearly straight up, without any hint of a respite.

The kicker is that the S&P 500 index, should one like to apply Dow theory to it, should now be considered a PRIMARY BULL market, having successfully reversed the primary trend by topping the previous interim high of 934.70, posted at the close on January 6 of this year. That was off the low of November 20, 2008, of 752.44, and prior to the subsequent low of 676.53 (March 9, 2009). If one follows only the S&P 500, chartists would have to agree that we are now - without a doubt - in a bull market.

As an offset to that queer finding, the actual Dow Jones Industrial Index, upon which Dow Theory is based, still has room to run before breaking the primary - bearish - trend. The Dow would have to reach 9034.69, which it did on January 2, 2009, before declaring a new primary Bull market. The transportation index would also have to confirm, and, since those two events have yet to occur, one can safely assume that the current rally is indeed of the bear market variety, albeit quickly closing ground on fully debunking that data set.

All of this has occurred in an environment of growing, near-record unemployment, continuing declines in the median price of housing, a handful of Fed and Treasury initiatives to stimulate the economy, and the bankruptcies of Chrysler and General Motors, the latter occurring today and being the largest bankruptcy in the history of the United States.

While the Fed floods the world with newly-printed currency, commodities have also gained - not unexpected - as the dollar has declined against other currencies. All of this adds up to a great deal of uncertainty, a condition usually associated with market declines, not rapid, non-stop gains.

I, among others, have called the "top" incorrectly more times than we'd like to admit. There seems to be no stopping the engine of Wall Street, despite stocks on the S&P 500 having cut dividend returns to record lows while price-earning ratios have soared to levels normally associated with the end of long bull markets. The only way this rally continues is if the market is being manipulated, and that is the only conclusion which I can make at this point. There simply is not enough evidence that the economy has returned to a growth posture, nor any indication that stocks are actually being valued correctly, that is, discounting future growth. Most of the large gainers are actually showing a negative trend of declining earnings, which, in more normal times, would spark selling, not buying.

Dow 8,721.44, +221.11 (2.60%)
NASDAQ 1,828.68, +54.35 (3.06%)
S&P 500 942.87, +23.73 (2.58%)
NYSE Composite 6,169.0698, +165.00 (2.75%)

Advancing issues crushed decliners, 5159-1405. The biggest story of the day has to be the rollover of new highs finally surpassing new lows, 130-105. This is a reversal of a trend that has held in place every day except five or six since September, 2007. This is either the starting point of another bull run, which could dwarf even the current run-up, or a signal to sell everything as quickly as possible. The rally has pulled even the worst companies up by the bootstraps.

Volume on the day was higher than levels experienced last week, for no known reason, though not significantly.

NYSE Volume 1,500,474,000
NASDAQ Volume 2,647,576,000

Commodities in the energy area went ballistic. Crude oil gained $2.27, to $68.58, the highest point since November 4, 2008, seven months ago. Unfortunately, for those of us who still have to use gasoline to power our personal transportation devices, back in November of last year, prices were declining. They are now galloping ahead. Natural gas gained a whopping 41 cents, to $4.25, odd, because natural gas is primarily used for heating homes, and we are heading into warm summer months. The rise in natural gas was more than 11% in just one day.

Just as oddly, the metals responded in less-than-enthusiastic fashion. Gold actually fell 30 cents, to settle at $980.00. Silver gained 13 cents to finish at $15.74 per ounce in New York.

There were more "green shoots" of economic data, such as a 0.5% rise in personal income, a smaller-than-expected decline in personal spending and an 0.8% increase in April construction spending. Of course, those minor positives should have been more than offset by the largest bankruptcy in US history, the coming shutdown of 12-15 plants, job losses between autoworkers and dealers of more than 100,000, and a general malaise in manufacturing.

It just doesn't seem right that on the death of General Motors, Wall Street would throw a party.

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