"This is a bullshit rally!"
Fascinating and instructive conversation with a few of our traders/clients this afternoon, including a hedge fund momentum gunner who asked me "if this rally really mattered."
The answer is simply if it goes against you, it matters to your bottom line and/or your clients net for the year. If you were long going into this you made money, you showed a better P&L, your assets under management grew, your clients are happy. If you were short, you got your nuts squeezed, and that's that.
More importantly, the S&P cleared key resistance, the spread triple top so many technicians have been talking about is now toast (See chart at bottom). If this breakout holds holds the next couple of days, that will inform of us about the technical strength right here, and if it fails, that will also be quite instructive. Indeed, this is shaping up to be quite an important rally.
So to answer the original question, yes, this rally matters.
"This is a bullshit rally" he said.
I asked him Why? Specifically, I ask:
"Do you disagree with this because you were positioned improperly, or because you cannot find a rational basis for today's move? Do either of those things matter?"
No answer. He then asks me, "What did you think of today's Retail data?"
Sigh. . . I said it was weak, that most retailers were doing only fair, that in addition to anyone home-related (i.e., Home Depot (HD) and Sears (SHLD)), we saw the Department stores doing poorly, Macy's (M) and JCPenney (JCP). We already heard Target (TGT) was at the low end of their range.
Here comes the money shot: "And Wal-Mart" he asked?
Mediocre. They don't break out food (as they do energy), but we can draw some assumptions from their breakdown between Wal-mart and Sam's Price Club (see our earlier post), as well as what BJs said. As we learned today, Food sales at Wal-Mart, Sam's, Cost-Co (COST) and BJ's Warehouse (BJ) were robust.
Here's the key line from BJ's report:
"Sales of food increased by 6% and sales of general merchandise increased by approximately 1%."
So to answer all of his queries: yes, today's rally mattered. Yes, the retail sales data was weak. Yes, it was essentially a celebration of higher food prices.
However, if you are looking for a rational basis for the day to day movements of markets, if you seek to find a degree of serenity by understanding why markets do what they do short term (A/K/A noise), well then you are going to drive yourself insane.
Here's that chart mentioned above:
SPX Breakout Triple Top
Thursday, July 12, 2007 | 04:45 PM | Permalink
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Comments
well put...
warning hind sight pontification below:
"usually" when prices jump like they did from the march low... and then tightly form a flag...
neither breaking out over 13700 nor going under 13250...it's not really a triple top... but a consolidation where prices would tend to continue to go in the direction the were going upon entering the aforementioned consolidation...
THE KEY WAS NOT TO SELL UNTIL IT BROKE DOWN DECISIVELY UNDER 13250...
Posted by: SINGER | Jul 12, 2007 5:42:20 PM
Hedgies(1.0E666) vs. Shorts(0)
Posted by: Kp | Jul 12, 2007 5:43:53 PM
Bravo!
Posted by: babygal | Jul 12, 2007 5:48:14 PM
I believe that inflation is higher than the government numbers. However, is the growth at Sams, BJs, Costco, etc really mostly food inflation? If so, inflation is a whole lot worse than I thought.
Posted by: GerryL | Jul 12, 2007 5:56:38 PM
Barry,
Post this article or an excerpt on the main page. From the St. Louis Fed - "Is the US Bankrupt?"
http://research.stlouisfed.org/publications/review/06/07/Kotlikoff.pdf
Posted by: OwnPuts | Jul 12, 2007 5:58:54 PM
Well, whether this was a valid breakout or not, or whether the trend followers pile on from here on out does not really matter.
Up to today, the bullish position was correct and all bears were wrong!
The probabilities favor the bullish stance for the foreseeable future, notwithstanding one or the other pullback.
The famous perennial pessimist writing for a famous Wall Street weekly is usually wrong, no matter whether he obsesses about subprime loans, CDO's or anything else.
Posted by: Werner Merthens | Jul 12, 2007 6:03:58 PM
Very well penned Barry. The psychology got wound into a tailspin of negativity...and we're seeing the results of that crowded belief.
I strongly suggest reading Lewis Sanders' piece, "Last Risk Premium Standing" (Alliance Bernstein).
Posted by: Fred | Jul 12, 2007 6:05:42 PM
I'll take a bullshit rally any day.
Posted by: bam | Jul 12, 2007 6:08:35 PM
With inflation rising, the dollar tanking and the Fed stuck because of housing, shouldn't that be good for the market?
The worse place to have your money at the moment is under the mattress. At least stocks have some degree of intrinsic worth.
Posted by: Brig | Jul 12, 2007 6:10:18 PM
yesterday morning dudley doright was pumping the money in. merrilly and goldiman were buying the futures from the getgo yesterday late morning and all day today. If those two want the market up, they can easily move it up. the tail wags the dog.
Posted by: econ101 | Jul 12, 2007 6:41:14 PM
the mantra of this market is that "liquidity trumps all." so, the real question is what is the source of that liquidity and how long will it continue to pump up the market. there are some signs that the sources of liquidity are drying up a bit. yields are rising, spreads are widening, credit standards are tightening, the swiss franc (carry trade) has rallied and the japanese yen is at least looking like it might rally, too... but more than anything liquidity is a function of psychology and the willingness of traders and investors to take risk. days like today will surely keep the risk-takers happy, but psychology is a fragile thing, so we shall see... (shout out to barry: love your website and what you have to say on the markets. keep up the great work.)
Posted by: kensdad | Jul 12, 2007 7:10:08 PM
barry, i think it's funny how you imply that fundamentals don't matter, but insist on using them to predict the direction of markets.
~~~
BR: I use Economic fundamentals as one factor of many many different elements -- psychology/sentiment, trend, monetary/taxation, market internals/technicals, liquidity, interest rates, momentum -- to look forward 6 to 18 months.
Not that I have a clue what's going to happen, but I know the early signs to look for to let me know slightly ahead of time.
But the day-to-day jinks and jags? Pure noise . . .
Posted by: shauncy | Jul 12, 2007 7:30:41 PM
the spx-tlt ratio is right at June's high....the last piece of resistance. if this is broken, are we going the see that parabolic penultimate rally that some are looking for?
Posted by: johntron | Jul 12, 2007 7:57:31 PM
shauncy said:
>>>barry, i think it's funny how you imply that fundamentals don't matter, but insist on using them to predict the direction of markets.<<<
I think it's funny how you base your conclusion on your own false assumption. Now that's funny.
Posted by: Michael C. | Jul 12, 2007 7:59:27 PM
I have noticed that we rise on falling volume and fall on rising volume, which all things being equal, ain't good. Still the chart says the flying pig may have a bit further to fly before it makes the Bar-B-Q.
Posted by: SPECTRE of Deflation | Jul 12, 2007 8:16:47 PM
My pet theory is that today's Bank of Japan decision keep its benchmark interest rate at 0.5% is a major source of liquidity for US equities. My surprise was that the BOJ appears unlikely to ratchet rates upward in August.
Otherwise, I am puzzled at the exuberance in the face of Moody's and S&P's downward rating of RMBS.
I am confused, but glad that my bet on gold miners is working out well. Appreciate all the musings, Barry.
Posted by: sid falco | Jul 12, 2007 8:26:22 PM
Too many traders, both pro's and amateurs, were leaning the wrong way. Mass capitulation on the short side today. What causes people to short a rising market is beyond me. It's good way to get your head handed to you.
Rule #1: the trend is your friend. Rule 2: Never forget Rule #1.
Posted by: Steve C. | Jul 12, 2007 8:41:28 PM
No I don't fathom it either , but I screwed up a couple of months ago shorting the market. I decided to see what was in front of me and join in a few weeks ago and have made a pile. Yes my intellectual pride has taken a battering as my wife looked at me today and said "looks like your financial knowledge,life experience and fundamental analysis based on years of academic study is a bit crap" I pointed out that todays silliness paid for our summer vacation. Do I beleive it will all end in tears - yes - am I stupid enough to call the top -NO.
Good luck all - poor Doug Kass!
Posted by: Arnab Dutt | Jul 12, 2007 8:49:22 PM
Of cause it was a bullshit rally. It depends on how you define the bullshit.
The bears have been bullshitting about subprime bonds B.S., “the market is overdue for a 10% correction B.S.”, etc… As a result of heavy shorting and overstretching the market with the record short interest (the highest in history NYSE short interest and NYSE specialists short interest), the market was artificially depressed (below the mean and where it should be)
Shares Sold Short NYSE - this week 12467283 (prior week 11761191)
NYSE Specialist Short Ratio - this week 7.16 (prior week 0.00)
The market was heavily shorted and artificially depressed by the bears. Today, the bullshit that the bears were spreading was hitting the fan and the market snapped back up to the mean causing this bullshit rally. (Bullshit rally because the bullshit was flying back to the bears, aka Short Squeeze Rally)
Posted by: Assassin | Jul 12, 2007 8:56:39 PM
I suspect Assassin is partly right. This rally is disbelieved and heavily shorted. At the same time, fundamental structural issues are worsening as the US consumer slows a bit.
Regardless, strength overseas, relatively low interest rates, and above all liquidity trumps all else.
Posted by: Barry Ritholtz | Jul 12, 2007 9:15:52 PM
The economy will have to support it in Q3. IMO growth will be dissappointing in Q2 with the weakened PCE. If it doesn't improve in the 3rd quarter, or gets worse, the game is over. I think a temp pullback is in due because this rally's cover was overdone. That isn't news however. If the economy does rebound that is another year of equity growth amid the raising rates. Maybe not huge growth, but growth. Very interesting how this is like the late 60's after artifically low rates gave way after the 66/67 slump and the 68 growth surge. Will we see the same thing in 2008?
Rates are low because the US economy is sluggish and has been since last Augest. Once payroll revisions are in, we will find how much.
If the economy does pick up speed again, so will higher rates and possibly higher FED rates. That is the danger when you over-liquidate the system. The housing busts decline is slow, but you force rates up worldwide eventually strangling the beast.
Posted by: ac | Jul 12, 2007 9:32:41 PM
I think Sid Falco has it right - the yen carry trade is alive and well.
It is rather amazing to watch this wheel of liquidity go round and round - as soon as one source has problems another steps up to take its place.
Of course, that is by necessity as Ponzi finance such as this requires monetary expansion simply to tread water.
In the meantime, relying on meaningful data and fundamental measures is like trying to teach your son the dangers of alcohol consumption during a frat party.
Posted by: Winston Munn | Jul 12, 2007 9:37:36 PM
Can you tell us when we're going to party like it's 1929?
I agree with the guy that said it's a bs rally.
Posted by: Hieronymous B | Jul 12, 2007 9:39:41 PM
Rally = BOJ inactiveness on rate-hike + (WM+COSC+BJ+SAM'S)
BOJ Inactiveness = Continuing Carry-trade = cheap money = liquidity = wheel of fortune continues
WM+COSC+BJ+SAMS = People moving from convenience to discount stores. People can buy more with the same $100 at a Sam's than at Target. To me it shows, middle america is really tightening its belt and decided they should travel more to pay less.
Even though I was mostly short this market for the last two months now, I always assumed Nasdaq could see 2700 before it crashed. Why couldn't I wait then? Because it shouldn't have seen 2700. But now that it did, I love my position even more, it will pay back what it has lost and make more.
Add another couple of points for tomorrow being Friday, but that is that. 2701+Tomorrow's points is the highest we we will ever see this market for the next few years.
Posted by: Mich35.5 | Jul 12, 2007 9:42:33 PM
"I think Sid Falco has it right - the yen carry trade is alive and well"
The carrytrade is vastly overblown. Even if the USD crashed, Japan has already indicated they would literally destroy what is left of the Yen to keep pace with the dollar.
The endgame to me is the housing bust's decline infecting prime loans next year and builders bankrupting in droves while rates rise. That is the game over signal IMO. Destroying Subprime/Alt-A only infects a chunk of the market. So it drops new home sales for example to .650. Historically that is a solid number. Damage to prime loans would probably mean a new home sales drop to record lows.
Posted by: ac | Jul 12, 2007 9:43:37 PM
