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Jeff Saut: Rally Till Spring?

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Upswing could continue - If the velocity of money slows.

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Editor's Note: The following article was written by Raymond James Chief Investment Strategist Jeff Saut. It has been reproduced with permission for the benefit of the Minyanville community.

Spring officially begins this Friday, and many Wall Street wags are saying that economic growth won't resume for years, which in turn implies that last week's stock market rally was/is nothing more than a bear-market bounce. In Last Week of the Selling Stampede?, too posed the question of whether this would be a bear market rally, or something more. As stated:

"I have suggested the lows were likely going to come with either a whimper or a bang. Indeed, on CNBC last Monday, I said the bear case was now completely on the table. Typically, when the bear case is on the table, at least 90% of the stock market's decline is already priced into the various market averages.

"The question then becomes, does the decline end with a whimper, or a bang? A bang would be a selling climax, like the one seen at the 1987 lows. A whimper might just be like the pattern seen at the 1974 stock market lows, whereby the DJIA made a selling dry-up low.

"Recall the events of the 1974 bottoming sequence. President Nixon resigned in August, and the DJIA declined some 27% into its October low of 584. From there a stutter-step rally ensued that would lift the senior index 15.5% (to 675) before peaking in November. The Dow subsequently declined to a new 12-year low, which undercut the October low of 584, and in the process totally annihilated optimism by registering a new bear market low reading of 577 on substantially reduced volume (read: selling dry-up).

"And that was it: The DJIA rallied into the new year, and, on January 27, 1975, a Dow Theory buy signal was rendered; the rest, as they say, is history. Worth mentioning is that the rally off the December 1974 low began as a short covering bear-market rally, but turned into a bear-market bottom that was never breached.

Whether that pattern plays this time remains to be seen, but I think the major market averages are at/close to at least a tradable low - maybe more.

As Thomas Lee, Equity Strategist at JPMorgan, notes:

"Retracing 12-year lows for the Dow is an incredibly rare event. Besides the retest of 1997 lows seen on Monday (3/9/09), this has only happened two other times, on April 8, 1932, and December 6, 1974. It is noteworthy that the 12-year low in 1932 was three months before the end of the bear market and the one in 1974 was exactly the low for that bear market."

While 2 datapoints aren't sufficient to conclude the bear market is over, I do find this observation interesting. Two weeks ago, I said on CNBC that the stock markets were on track to bottom that week, and listed a number of reasons for my view. If the S&P 500 could knife decisively above the 740-750 overhead resistance zone, I argued, participants would become increasingly convinced that the 666 low that occurred on March 9 was at least a short/intermediate "low" - and maybe more.
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No positions in stocks mentioned.
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