50% Retracement of 2002-2007 Rally
It has long been my perspective that following the great crash of 2000, we would be stuck in a secular bear market, with cyclical rallies and sell offs.
The lows set in October 2002/March 2003, up until the October 2007 highs, was an example of a cyclical rally. The selloff from October 2007 has been a cyclical bear within the larger context of a secular bear.
As of today, we have retraced exactly half of the gains from the 2002/03 lows up to the 2007 highs.
Given how horrific the news flow is, the general psychology is very negative. Not nearly enough to create a lasting low, but certainly enough to generate an interesting bounce.
That 50% retrace is where one would expect to see some sort of *rally. I don't expect it to last very long, and its really a long term selling opportunity, but those with aggressive short positions should consider hedging those positions. I can understand not wanting to cover, given the dislocation of a potential AIG failure would cause. But at this point, the spring has been wound pretty tight.
* Be aware that I tend to be early, and that active traders should always scale in.
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Dow Industrial Average, Weekly (2002-08)
click for larger chart
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S&P500, Weekly (2002-08)
click for larger chart
Charts courtesy of FusionIQ, Bloomberg
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Tuesday, September 16, 2008 | 10:33 AM | Permalink
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BR - Thanks for taking a step back and looking at the broader market from a six-year perspective. Another reason TBP is one of the first sites I read in the AM.
Posted by: WershovenistPig | Sep 16, 2008 10:40:13 AM
"long-term selling opportunity"? barry, where do you think we bottom? and i dont mean a Pisani bottom. back to 850 of 10/02? all the way back to 400 where we started this blowoff back in '95?
Posted by: scorpio | Sep 16, 2008 10:46:53 AM
Thanks -- I was just wondering last night if you might call a tradeable bottom soon :)
Posted by: John D | Sep 16, 2008 10:47:16 AM
Yeah, I have this played for a bounce as well - especially in the area of energy stocks - although I have some SDS on as a hedge.
With more longs on than I have had in a while, I didn't have the best morning when I turned on the tube, but there was a lot of blood in the streets yesterday and we didn't break through what I see as the key technical of SPX 1175.
A lot of smart people on here don't agree with me ... good luck to all and be careful on both sides of the ball today.
Posted by: leftback | Sep 16, 2008 10:47:35 AM
gentlemen, we have a rate cut and it's 50bp
Posted by: anon | Sep 16, 2008 11:00:10 AM
if you look at a weekly 10 year SPX chart, MOST of 00-03 decline took place after 20 week EMA crossed below 100 week EMA. Happened again 1st qtr 2008.
also, bring on systemic risk. sick of hearing Cramer and Greenberg on how AIG and NYC are indispensable to US. outside of NYC and D.C., country won't stand for this bail-out crap. what about GM? What about my corner grocery store? What about me? I could use a bail-out.
Posted by: doubletop on SPX | Sep 16, 2008 11:01:23 AM
i agree BR. good call!!
Posted by: david | Sep 16, 2008 11:11:39 AM
Your analysis of long-term trends is part of why I don't, and won't, own stocks. People scoff at my boring US bonds and cd's, but I get my principal back, w/ a little to boot. I'm the tortoise, but I'm still in the game, and survival is the point of the game, n'cest pas?. My daytrader buddy down the street went bankrupt and got divorced.
I may not even beat inflation, but really, did any market (index) investors from about 1999-today beat inflation? Did they even get a positive return? The Dow just barely cracked its old high from 2000 last year, and is retracing its steps, perhaps well below its previous bottom.
IMO, the only way to win in the stock markets is to pick individual stocks based on information nobody else has, and if you're not on the Street, or buddies w/ a company CEO, you haven't got any info for trading, and if you do have info for trading, it's probably illegal to trade w/ it.
I don't read TBP for investing advice, but for the excellent analysis of the big forces at work driving the economic and financial world. That, and it's fun. Thanks for all the good work BR.
Posted by: Donkei | Sep 16, 2008 11:13:41 AM
Bonds are a total joke
Posted by: shrek | Sep 16, 2008 11:20:42 AM
nice sight
BR - Thanks for taking a step back and looking at the broader market from a six-year perspective. Another reason TBP is one of the first sites I read in the AM.
Posted by: WershovenistPig | Sep 16, 2008 10:40:13 AM
just to reiterate, the Frame changes the Picture.
Posted by: Mark E Hoffer | Sep 16, 2008 11:29:32 AM
i think we bounce from here as well. that's the technical and fundamental picture given what the PPT can pull off.
rumors will be rampant but i don't think they'll let aig die. other positives: wamu-jpm, leh-barclays, mer-bac and a potential rate cut...
Posted by: karen | Sep 16, 2008 11:33:38 AM
BAH! voodoo numbers...
but good advice, and the vix up around 30 to boot. Caution seems warranted.
Looks like the dow already bounced off the fifty(in july) from that chart.
incidentally, bill luby had an awesome post this week ( http://vixandmore.blogspot.com/2008/09/vix-spikes-and-2002-market-bottom.html ) about how the vix didn't pick the 2002 bottom too well...
today's rally doesn't seem too convincing either.
To get me to cover you need to show me panic buying, 90% up volume on nyse or nasd. That's been working great recently (march bottom). so called "90-90 days" (90% down followed by 90% up volume) work even better.
That's my take on things anyway.
Posted by: steve from asia | Sep 16, 2008 11:34:00 AM
Wall Street-bastion of free market capitalism-- wants Fed to do what private enterprise won't do: come in an clean up the corrupt AIG stench. what a system.
Logic says a bounce, but I'm not going to bet on it. margin calls, hedge redemptions, etc.
Posted by: rally no | Sep 16, 2008 11:34:45 AM
Before betting on the rate cut, take a look at the July TIC data.
One word: appaling.
Posted by: Cool | Sep 16, 2008 11:38:24 AM
I agree. Covering short positions (or at least lightening up on them) is a good idea at this point.
I think we’ll see a rally beginning in mid-October, if not before.
Posted by: DL | Sep 16, 2008 11:42:53 AM
Dont know about the Technicals and 50% retracement and all that but how can one have a good bounce if AIG as BR put it "Soon to be buried treasure" goes.
Tough times these but I still feel that markets are far from reflecting the same. And one fine day may just start doing that.
Posted by: pj | Sep 16, 2008 11:49:14 AM
Here's my take, for what it's worth:
We enjoyed a linear rise int he secular bull market from 1982-1995. From 1995 on we went into bubble-and-burst territory.
If you extend the linear rise of 1982-1995 into the future, you can see that the descending burst of the DJI bubble meets the linear rise somewhere around 2014 at somewhere around 8500.
That's when/where I expect the next secular bull to begin.
Oversimplistic, I know. But something to test hypotheses against.
Posted by: attobuoy | Sep 16, 2008 11:55:01 AM
There's been a a few on this thread that have been calling for exactly this kind of price action in equities and commodities. We're in the throes of a deflationary spiral right now, the worst possible event for a debtor nation.
Following on with Barry's argument that we're in a "secular" bear market since 2000... I agree with this totally. Elliot Wave analysis suggest this current move down since Oct.2007 is the "C" Wave of a huge "ABC" pattern that began in 2000. It strongly suggests a move to 791 on the SP500.
I've said this several times...we will look back on the decade that was 2000-2010 as a massive consolidative period, where the market simply needed a decade to digest the powerful multi-decade rally from 1981-2000. This is very common.
So, we're going to have a great buying opportunity sometime in late 2009 at around 800 on the SP.
Every rally continues to be a SELLING Opportunity.
The 50% retracement "might" be some minor support, but the 61.8% at 1077 is more likely to provide more solid support.
Good luck everyone.
- AT
Posted by: Andy Tabbo | Sep 16, 2008 11:55:51 AM
I believe any bounce will be quick and dirty.
The market NEEDS to get REALLY bloody to provide opportunists a deal they can't refuse. My guess would be a sharp one day or two day rally sometime between now and Tuesday the 23rd of September to NO HIGHER than 1230.
Then we see the tumult the market needs. A bloody one to two weeks of mini crash after mini crash. Needs to hit below 1100 +/-. Another level of 1080 or even 1025 looks like a real logical level of lore for a strong reversal.
Posted by: Kirk | Sep 16, 2008 11:59:25 AM
Oh hell, why stop at 61%? Why not 90%? According the the bears here, even a company with a book value of $20 and earning billions a year should be worth $5.
Dow 3000 here we come!!
Posted by: E | Sep 16, 2008 12:05:13 PM
Definitely should expect some sort of a bounce, but may only be an opportunity to buy cheap puts and increase short positions...I'm still short Oil...
Posted by: Joe | Sep 16, 2008 12:22:46 PM
Not sure who that other E is, but I'm expecting another October of yore, like the biggies in 29 and 87. We are setting up perfectly.
Posted by: E | Sep 16, 2008 12:29:14 PM
Any person with enough knowledge can make current market conditions look like a buying opportunity or a selling opportunity and provide supportive, empirical "evidence" of their views.
Ultimately, it's all chatter and noise, as opposing sides fight for the attention of those who will listen to them display their knowledge and their ideals on how we should all live, much like the Presidential campaign...
The best advice at this juncture may be to "tune out" and go somewhere and relax or, at a minimum, enjoy a conversation with someone who has less "knowledge" but more "wisdom..."
"I prefer the company of peasants because they have not been educated sufficiently to reason incorrectly." ~ Michel de Montaigne
Posted by: The Financial Philosopher | Sep 16, 2008 1:05:02 PM
I covered/sold all leap-puts yesterday. If you insist on staying short now, may I suggest some hedging? Sell puts against your position and use the money to buy protective call. You may thank yourself later.
As for me, I'm 100% cash right now and will reenter after a decent rally. (Dow approaching its recent high of about 11400) If it doesn't happen, then I've missed an opportunity. But there will be others.
Now way i would trade short...or long...through the FOMC announcement.
Good Luck to all.
Posted by: Lysander | Sep 16, 2008 2:07:51 PM
the BOTTOM will come when it comes....predictions are a crap shoot just as most of the market is.....50% of the time you will be correct and 50% of the time you will be wrong.
Posted by: grumpyoldvet | Sep 16, 2008 2:08:08 PM
