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Is Stock Market Rally 2009 Like Bear Rally of 2002?

Stock-Markets / Stocks Bear Market Jul 27, 2009 - 05:46 PM GMT

By: Guy_Lerner

Stock-Markets

Best Financial Markets Analysis ArticleI have often thought that the 2009 rally resembles the rally off the September 11, 2001 lows that lasted into March, 2002. Even though the causes of the "crisis" are different, there are many noteworthy similarities.


In both cases, the bear market had been going on for greater than a year, and like then, investors are now hopeful that the worst is behind us. In the after math of 9/11, there was a lot of hope that America will bounce back. Hey, "we always do" is the phrase. "America is great. America is strong." (And I don't doubt our resolve as citizens in this country, but feel good rah rah is not going to get it done when we have real problems to face.) But by March, 2002, economic reality set in leading to one vicious head fake that led to new lows and a more solid base to launch a new bull market.

Is 2009 setting up like 2002? Will economic reality set in? Is the worst really behind us?

The short answer is that the jury is still out on this rally. It has been strong. It looks good as prices breakout to new 9 month highs, but the bulls remain hopeful that the all knowing, all seeing stock market has a crystal ball that can see those things that us normal folks can't see: better economic times ahead. Most would agree that the economic landscape is frought with landmines.

Investors are clearly under the assumption that the worst is behind us. But as we found out in 2002 for stock prices, the worst was not behind us. Back then, the economy had bottomed as the recession had officially ended in November, 2001, but the market's bottom was much lower. Currently, signs are pointing to a bottom in the economy as in "things" are not getting worse, and yet with unemployment still rising, we could even argue this point. But I know we can agree that "not getting worse" doesn't mean that they are going to get better either, and this is were investors remain hopeful.

Like 2002, 2009 finds the Federal Reserve extremely accommodative. Liquidity remains abundant. Like 2002, the leading economic indicators in 2009 are improving. Like 2002, the S&P500 is above its 200 day moving average. Like 2002, we find prices on the S&P500 having closed above its simple 10 month moving average. Yes, the similarities are there.

The S&P500 rally in 2001 and 2002 went from the low on September 21 to a high on March 19. It lasted 123 trading days. From low to high the percentage gain was 21%. The currently rally has gone on 98 trading days since March 6, 2009. Through Friday, the percentage gain on the S&P500 has been 43%! Rather than say that such strength is just a sign of new bull market, I could argue it is just mean reversion of a deeply oversold market.

Technically, the current rally is hitting new highs while the 2002 rally ended in a triple top. See figure 1 for a daily graph comparing 2002 (orange line) to 2009 (blue line). This is a clear difference - new highs (2009) v. failure to make new highs (2002).

Figure 1. 2002 (orange) v. 2009 (blue) / daily

For now the current rally has come a long way. A lot of hope is built in. Some may call this "the wall of worry" as the markets continue to climb in the face of bad news. Technically, I look at a market that has been driven higher by short covering -i.e., the "this time is different" scenario - and where stocks are for renting not owning.

I still believe that this time period will prove to be a bear market rally, but in my mind, it doesn't matter what we call it anyway. Simply put this is just not the time or place to jump in with abandon as it is difficult to see how we get there (secular bull market) from here.

Does this mean we re-test the March 9, 2009 lows? I think we are a long way from seeing that happen. Stocks would have to move lower, and of course, if they move lower, investor sentiment will become bearish. This will be a buy signal. If this buy signal fails to produce a sustainable tradeable rally, then there is risk that the markets could retest their March, 2009 lows. As I stated, this is a long ways off.

Is 2009 shaping up like 2002? Possibly. As stocks are hitting new highs, investors certainly have put a lot of hope in a recovery that has yet to materialize.

By Guy Lerner

http://thetechnicaltakedotcom.blogspot.com/

Guy M. Lerner, MD is the founder of ARL Advisers, LLC and managing partner of ARL Investment Partners, L.P. Dr. Lerner utilizes a research driven approach to determine those factors which lead to sustainable moves in the markets. He has developed many proprietary tools and trading models in his quest to outperform. Over the past four years, Lerner has shared his innovative approach with the readers of RealMoney.com and TheStreet.com as a featured columnist. He has been a regular guest on the Money Man Radio Show, DEX-TV, routinely published in the some of the most widely-read financial publications and has been a marquee speaker at financial seminars around the world.

© 2009 Copyright Guy Lerner - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Guy Lerner Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Derek
29 Jul 09, 03:08
2002 vs 2009: the year of the dollar

my friend, this time around, the almighty dollar index will determine how far we go.

I disagree when you call this move "short covering." Clearly, we have reacted strongly off of lows and convincingly, from March and throughout, due to high short interest. But the number of short positions is less than 1/3 now than the figure from early march, so to call this move to new highs "short covering" is far fetched.

Anyhow, some folks say tech leads this rally , but I dont see a pack of stocks leading that group (MSFT?? LOL). RIMM? even bigger lol.

I see no leadership, and I see a HEAVY HEAVY reliance on materials, industrials and energy equities. In other words, take those away, the S&P cant sustain the momentum.

Now that is evident anytime you see a dollar bump upwards from March until now. Like a chain reaction, oil, gold, basically the entire commodity sector pulls back--everything from Freeport MCM, to RIG, to more gold based miners like Newmont or Barrick. Anyhow, given the run up industrials just had, and the weakness in the names (see US ssteels report on tuesday), and the bulge in the dollar tuesday into this morning, we could see that important leg of the S&P fall off today. Take away the miners, all the oil names, and the industrial sector, and you're left with financials that NOBODY will commit to, tech names that are waaaaaaaaaay overextended now, or??? construction? retailers?? I dunno, todays a critical day, big selloff and we retest 930. If we can pull even for the day or even muster a gain, then leadership must come from another sector (coudl be healthcare, but how far can that take us???) and maybe we break 1000 afterall.

thx for the writeup


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