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Minyan Mailbag: Follow The Bouncing Bear


Chances to go long could be on horizon.

Prof. Sadana,

Was the market-move on July 16 the start of the real rally? Have I already missed the boat ?

Minyan T

Minyan T,

Your question is pertinent to those who've lost a lot of money staying long the past few weeks (since they thought March was the bear market bottom). They feel the need to recoup some of their losses. It's also important for those who've been patiently sitting on the sidelines, waiting for the time to buy.

Let's first examine the possibility that this rally marks the demise of the bear market. There's no concrete evidence of that, since it made the low of the move on July 15. From a technical perspective, the positive divergences required for a major low are not yet in place - even without taking the fundamental reasons (credit deflation, real-estate deflation, commodity inflation and resulting recession-fears) into account.

Over the last 80 years, bear markets chopped away 30% of the indexes, on average, before putting in a meaningful bottom. So our current standing of -20% on the S&P 500 might just be a rest-stop on the way further down.

If you look at this bounce relative to other bear-market bounces, and not as the "Ultimate Bottom," have traders missed the best entry point? After all, some key sectors -- like financials and semiconductors -- have moved substantially above the lows.

XLF (financial sector ETF) made an impressive 11% move on July 16; Wells Fargo (WFC) earnings propelled the sector, with strong gains in Citigroup (C), AIG (AIG) and MasterCard (MA). Intel's (INTC) rally drove SMH (semiconductor ETF) to a 2.1% gain. The advance was strong, and the Russell 2000's performance was spectacular at +3.6%.

During my long trading career, I've come to realize lows come not with a bang, but with a whimper. We usually see a retest with new lows, and the retest ought to be successful for the sizzle to not fizzle!

Let's examine SPY's (S&P 500 ETF) recent action at the Januray 2008 and March 2008 lows. At both, the market retreated and tested the closing low, or near the closing low, within the next few days. Sometimes, to really test the mettle of the traders, the low is even violated. But as long as the volume in the retest is low, it's deemed a successful test.

Click to enlarge

Here's another look at a different index in a different time frame. Check out the retest in Nasdaq, during a bounce in the last bear market of 2001-2003:

Click to enlarge

So, my friend, if you are already long, stay cautiously long! Enjoy the bounce while it lasts - but don't forget that it might be a roller coaster ride, with the usual stomach-churning effects. And if you're caught on the sidelines, take heart. You'll most likely be presented with another chance to go long. This doesn't seem to be a time to buy in July. Let'em fly!

This might seem like a lot of complicated analysis for a simple market move, but we should always remember the words of William Arthur Ward:

The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.

Prof. Sadana
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