Wednesday, December 16, 2009

This Is an "Airlift," Not a Bull Market

The market rally is all about floating on air. There is no Bernanke money propping it up. It is one of the greatest dead cat bounces in the history of dead cats.

In short, those who were scared out of the market during the 2008 panic (and still have some cash) are back in buying, but they don't have the money to propel it with any strength. They are just lifting it through the light resistance area that was formed during the crash period. The heavy lifting is ahead(where the heavy resistance is from 12-03 through 12-06) and the volume (that is the money) isn't there to lift it higher through years worth of resistance.

The below Barry Ritholz chart clearly outlines the situation. The green arrow shows the up market, while the red arrow shows declining volume (that is less money buying). From a technical perspective, the market now has to eat through all the overhead stock that was bought between 12-03 and 12-06. These are the people that will sell on breakeven or a little profit (after seeing all their earlier profits and dreams crash in the Panic of '08) and there are thousands of them. Everyday they wake up and check their stock prices to see if it has reached their breakeven point with "a little profit". There is nowhere near enough buying power, i.e volume, to take these people out of their positions. It would take huge new Bernanke money printing that hasn't happened. This cat is about to hit the pavement once again.


  1. Wenzel, clearly you have not heeded AC Pigou who I quoted previously as observing: “The error of optimism dies in the crisis but in dying it ‘gives birth to an error of pessimism. This new error is born, not an infant, but a giant..."

    You may also want to reconsider using the phrase "dead-cat-bounce" as it was intended to describe a price move extending one to three weeks with a 10% to 15% change in price. The current uptrend is 9 months old and depending on the index, prices are up 50% to 60%. This price move has recaptured 1/2 to nearly 2/3rds of the previous bear market downtrend and is actually almost a classic description of the first leg of a new bull market.

    Finally, while I agree that rising prices on declining volume suggests the trend will not continue. It is not unprecedented for the first leg of a new bull market. Recently it occured in the spring of 1990 and most interestingly at the beginning of the last bull market beginning in March 2003.

    I don't know what the market's next move will be, but it is certainly reacting to more than just "Bernanke's money" or lack thereof.

  2. @Efinancial

    I get it there is no such thing as monetary theory. The world just spins any which way.

    But somehow you can empirically measure these spins, dead cats only refer to one to three week moves. For me a dead cat is cat that is, well dead. I don't care how far it jumps off the pavement if I know it is going to hit the pavement again.

    And, oh yeah, more empirical stiff without theory, "this is a classic first leg of a bull market" BUT "while I agree that rising prices on declining volume suggests the trend will not continue," followed by more empirical citations without theory.

    "I don't know what the market's next move will be, but it is certainly reacting to more than just "Bernanke's money" or lack thereof."

    Of course, you don't know. You have rejected all theory. There was an incredible money growth between 9-08 and 2-09 which can fuel one hell of a dead cat bounce. Then the money stopped, thus I fully expect a decline because there is no money to support the current market structure. And that is the logic without any empirical voodoo about in the year 1205 the stock market went up in January after it fell the year before in August.

  3. So its OK for you to use the "empirical stuff" that higher prices on weaker volume suggests the market is about to roll over but if I point out "emirical stuff" that shows it doesn't always work that way I am using "emirical voodoo."

    If you really get it, you wouldn't obsess about a single variable (M2) in a sea of variables.

    Here's a simplied version of the theory: (1) Price and volume changes are the effect; (2) Human action is the cause; (3) Individual actions are repeated time and again because human nature is the qualitative constant; (4) This repetitious behavior is reflected in repeating price and volume changes which result in trends. No voodoo required.

  4. @Efinancial

    If you read my post carefully, I do not refer to an empirical basis to my argument. I base it completely base it on deduction, which is what you do when you refer to the periods spring 1990 and March 2003.

    Further, I would never argue that there are "qualitative constants" in the sense you are attempting to use the term.

  5. Wenzel, I understand your theory is based on deduction, I just don't believe that specific timeing of cause and effect can be reliably deduced. There is no straight line between M2 manipulation and asset prices. Asset prices are effected by a multitude of variables, not the least of which is human expectation.

    However, new insights csn result from such disagreements and I do appreciate your feedback.

    I use the term qualitative constant to express my belief that human nature is relatively unchanging. Therefore an understanding of human nature can be a basis for predicting in a general directional way.