Recovery or Dead Cat Bounce?

Interested to hear what everyone's thoughts are on the last few days of positive trading in the market.

Could this be signs of recovery, or is it simply a rally following Citi's news?

Part of me thinks that this could be signs of recovery, for a couple of reasons.

A) The majority are expecting it to just be a rally, so most investors are treating it with caution.

B) No one expects a recovery to come this early, yet recoveries always come earlier then expected. If they didnt, then everyone would get in at the bottom of the market.

C) Yes unemployment is rising, however the market generally starts to recover before unemployment hits its peak.

D) Australian Business have started to streamline their businesses, much before they came desperate like in the U.S. So by taking cautionary measures, they are going to be in a better position.

E) Interest rates are likely to fall. Combine this with the fact that businesses are becoming more streamlined, there will become a point where companies appear more profitable then low bank interest.

G) Consumers have really tightened their belt in the last 12 months and with lower interest rates, they surely have to becoming more comfortable and confident in their own financial situations.

H) The outlook for the market is bleak, but this has been factored in already.

I) The chances are, that the majority of the investors who sell on a panic, have already fled the market. Any investors that have remained in the market for the past 12 months, have probably come too far to turn back, and are prepared to stick it out, so we are unlikely to see another level of high volume panic selling.

These are just my personal views, and I must admit I am not a financial adviser or scientist for that matter. I do not know the score of pie, and all I am running on is a Tafe Certificate IV in team leadership.

In saying that, I would be interested to hear people's thoughts on my views.

Re: Recovery or Dead Cat Bounce

Pythagerous said:

In saying that, I would be interested to hear people's thoughts on my views.

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Dead Cat Bounce. Bad news has barely started rolling in, in my opinion.

That being said, I have been buying Dec 08, Feb 09 and Mar 09 but still have most of my assets in cash, as when I try and bottom pick I only ever end up with a smelly finger and nothing else to show for it.

Hell my recent GPT purchase is showing a >100,000% annualised gain, so I must know what I am doing ? .... riiiight... (joke, joyce)

I thought this article quite interesting (WB and USA banking insights)

http://online.wsj.com/article/SB123672700679188601.html

Re: Recovery or Dead Cat Bounce

Pythagerous said:

C) Yes unemployment is rising, however the market generally starts to recover before unemployment hits its peak.

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I saw a chart recently that showed historically the S&P500 bottoms around the peak of US unemployment. I will see if I can find it again.

Re: Recovery or Dead Cat Bounce

I'm concerned that we are still in a massively over-leveraged environment. Household debt is still near record highs, business debt is high and Government debt is rapidly rising to create 'stimulus'. The only way a recovery can occur now is if we decide to inflate the credit bubble further.....real recovery could still be a few years away IMO.

However there might be a handful of stocks that perform OK during these times.

dead cat bounce.

I hope you don't mind I use this format of replying, so no hard feelings.

Pythagerous said:

Interested to hear what everyone's thoughts are on the last few days of positive trading in the market.

Could this be signs of recovery, or is it simply a rally following Citi's news?

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No one can explained the rally. It is only based on the collection of sentiment of all investors' logical and emotional reasons.

A) The majority are expecting it to just be a rally, so most investors are treating it with caution.

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This is a given seeing how ridiciously OVERSOLD the global markets are in. (check technical charts) A rally is almost a guarantee because nothing ever goes straight down in straight line (as well as up)

B) No one expects a recovery to come this early, yet recoveries always come earlier then expected. If they didnt, then everyone would get in at the bottom of the market.

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No, recoveries always come MUCH LATER than expected. The mass will always get it wrong, that's a guarantee. No one can ever predict the bottom with 100% accuracy.

C) Yes unemployment is rising, however the market generally starts to recover before unemployment hits its peak.

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Note recency bias effect. Your statement was a generalisation and may not necessary applies to current environment. Unemployment has only just started rising anyway. And the market can become more "irrational" longer than you can remain solvent.

D) Australian Business have started to streamline their businesses, much before they came desperate like in the U.S. So by taking cautionary measures, they are going to be in a better position.

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I actually don't quite understand this statement. What do you mean by "streamline"? How is it going to make them in a better position?

E) Interest rates are likely to fall. Combine this with the fact that businesses are becoming more streamlined, there will become a point where companies appear more profitable then low bank interest.

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Lower bank interest does not necessary mean greater profits. Companies who are on pure cash with little debt, therefore not as affected by short term interest rates movement, would still suffer because of a collapse in demand.

G) Consumers have really tightened their belt in the last 12 months and with lower interest rates, they surely have to becoming more comfortable and confident in their own financial situations.

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Ehhhh....consumers are tightening their belt because they ARE NOT comfortable and confident in their CURRENT AND FUTURE financial situations.

We are now facing a worldwide consumer sentiment change in which leveraging and overspending will be replaced by conservative investing and increased savings.

H) The outlook for the market is bleak, but this has been factored in already.

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The future is always uncertain. So the common phrase "already factored in" is a myth because no one can predict to a certain degree what is the future outlook for the market.

I) The chances are, that the majority of the investors who sell on a panic, have already fled the market. Any investors that have remained in the market for the past 12 months, have probably come too far to turn back, and are prepared to stick it out, so we are unlikely to see another level of high volume panic selling.

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This is not certain again. While I agree the first wave of panic selling has increased the cash position of the investors' investment portfolio, I cannot rule out the possibility of another high level volumn panic selling. As in H), the future is uncertain and any more bad news or major bankrupcies like Citigroup MAY create another wave.

(P.S: Citigroup is dead man walking. They are already insolvent and will either end up in full nationalisation or go bankrupt.)

Conclusion:

The amount of acceptance in gloom and doom predictions have certainly caught up over the last 12 months. This made us contrarians who had similar D&G views less of a "contrarian" because the mainstream people are slowly accepting the view.

Regardless, a share market bottom is different to an economic bottom. There is certainly no economic bottom in sight given the massive amount of deleveraging that still needs to occur. The share market MAY bottom but that does not mean it is a good buy if the share prices remain stagnate and with low dividends over the last decade or two. (check 1920s and Japan history)

I believe that this is a dead cat bounce (for the share market anyway), but given the amount of gloom and doom, it may rally for longer than most people would expect. That would probably cause more people to believe the GFC is finally over and the "Mr Market Bear" will lure alot of people back in before smacking their head down all over again.

However, I am not putting money in my mouth because I don't think this is a tradeable rally, at least for me anyway. I do not have the plan for this rally and my capital is committed elsewhere.

These are my personal opinions as well.

P.S: And yes, I agree with Junior there are individual stocks that are certainly worth investing. Remember in a bear market, all good and bad shares would be taken down indiscriminately.

Ben Bernanke's big if

“US Federal Reserve chairman Ben Bernanke said that if the US banking system stabilises, the recession should end later this year, with fairly strong growth returning in 2010.”

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http://www.theaustralian.news.com.au/business/story/0,28124,25175116-5013868,00.html

That does not inspire confidence. A when would have been better.

Also, to what extent is this rally based on historical data (a 2 month profit statement from one of the US banks and FEB US retail sales ?)

MY own PERSONAL opinion

OK after great deliberation and chatting to my dog ....... we have come to the
conclusion that we have NOT hit OVERALL market bottom as yet ........ NO idea on how current rallys
will pan out and for how long ........ trade it regardless ......... but we think we have not hit base as yet
........ prolly wrong , often am ........

one rally dont make a market

Received an email from Ords this morning which provides their perspective on it. Not sure if i am allowed to post an email copy howveer it is interesting and if it is emailed without a confidentiality clause than i am presuming open slather.

My view on the below is it is a typical analysts each way bet and points at some facts opens your eyes to a few possible scenarios and lets you make up your own mind which is fair enough but i wouldnt want to be paying for ambiguous advice.

Email

If a sudden sharp rally is Day One, then Day Two usually brings a bit of selling. But if Day Three can produce another rally, history shows that the market has formed the base of an ongoing rally. There are, of course, no guarantees.

Since the bear market began, Wall Street has struggled to put together more than two days of significant rally before the next bad news shock has scuppered enthusiasm once more. The most notable exception was March to May last year. The 50% retracement experienced over that period was fuelled by a majority belief that the credit crisis had ended with the "rescue" of Bear Stearns. The minority, including FNArena, warned that Bear Stearns was more likely to be only the tip of the iceberg rather than the base.

It may be premature to talk about another significant rally, after only three days, but the fact is the majority on Wall Street is expecting one. This time, however, the majority is expecting only a bear market rally whereas last time the majority saw a return to the bull market. What this means is that shorts are likely to be quickly covered if the rally appears sustainable. Sellers are likely to step aside and buyers are likely to re-emerge. In other words, a rally (unimpeded by some new bombshell) would have its own internal combustion engine. But at some point the sellers will return.

On the other hand, if everybody believes something will happen, then the chances are greatly amplified that the opposite will happen. In this case, the opposite would be that a rally from here is not just a bear market rally - a bottom has thus indeed been found.

Your average bear market rally runs 20% (meausured as bottom-up) but can run as far as a 50% retracement from the previous peak (measured as top-down). Since the S&P 500 hit its intraday low last week, the index has rallied 12% already.

The intraday low, incidentally, was 666.

Great post Temjin. Always good to hear counter arguments against my thoughts, to bring me back to reality.

By streamlining, I am referring to the fact, that Australian companies have strated to tighten their belt. They are laying off staff in order to save costs, they are cutting down expenses. Once they trimm all the excess fat off, they are leaving themself open to improvement. Unlike the US, Australian business have gotten in a bit earlier, so Australian cost cutting is somewhat more of a preventative cautionary measure, as opposed to the U.S where their cost cutting appears to be more of cure.

Overall, yes, economic recoveries come later then expected, however if terms of the market, it generally covers before expected, as it is looking forward into the future.

Consumers are tightening their belts. I am not saying that they have tightened them enough just yet, however there will be a point in time, where consumers feel that they have tightened there belts enough and they are confident with their on personal financial situation. Once they are comfortable, this is when they will start to spend and invest. At the moment, fear of job less, fear of the economic state and lower interest rates are assisting consumers with their ability to save.

Thanks to all those that have participated in this thread, it is extremely insightful.

Personally agree with most, this rally already seems overdone IMO, what exactly has changed in this last 2-3 days to cause this rally? Retail sales is the latest positive because they only fell 0.1%, but it was interesting to note that the unemployment figures that were released with it actually were revised up another 9,000, which is another new record. But that figure was conveniently buried behind the 'surprise lift' in non-auto sales; that makes me laugh. Also the mention of AT&T hiring 3,000 more staff made big headlines, which is funny because the number of staff they are looking at hiring is 1/3 of what were just sacked in the latest figures!

How can the market be 'bottoming' when sales are still decreasing and unemployment still rising? Citi's memo about being profitable for the last few months are laughable as AIG is still screaming for money. I wonder how long before the next company announces they need another $30b to operate or the whole financial system collapses

Meoww. Markets oversold? They were never worth what their inflated prices showed.

Comments from Comsec's Insight today:

It may seem an odd thing to do, but we need to repeat over and over ―this is Australia‖.

It’s so easy to assume that the problems in the US are our problems, in turn affecting our decisions and confidence levels.

The US has major problems in its banking sector. Australia doesn’t. The US has an over-supply of homes. Australia has an under-supply. And it doesn’t stop there with major differences on interest rates, new lending, fiscal policy and population growth.

Certainly the effect isn’t confined to Australia with caution by businesses and consumers stretching across the globe.

One way of describing it is the ―butterfly effect‖ – the butterfly of the US sub-prime mortgage mess has been flapping its wings, causing ripple effects across the globe. Consumers and businesses have become less confident, cutting back spending, investment and employment, with the negative consequences multiplying across regions.

It will only be when the US economy starts to stabilise, that investors in many countries will realise the extent of their tunnel-vision.

Matt Comyn General Manage

Its hard to imagine a bull market is just around the corner, although we could easily see a 20% bear market rally, I think in the medium term we are range bound at best.

I read were we can expect a Bear rally and the Dow went a little higher last night... gold moved up a bit then stopped maybe the Market is deciding which way next ..IMO RI P Cat.

I was remembering wrong. The S&P500 tends to bottom some time before US unemployment peaks. These charts are well worth a close look.

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=117070&t=01004553487438585767

My opinion is that this is just a rally but I think it will be quite a good rally maybe back to about 3700 or so, maybe even higher if it gains some real legs. If this rally does truly get going alot of people will jump in not wanting to miss out thinking it is the bottom and it will be these same people who become panic sellers in the next leg down.

Most of the people who wanted out are now out - shown by how the bad news in the last few weeks has failed to drive the markets down with any conviction.

I actually think we are getting close to a significant bottom, we could see 1 more major leg down and then sideways action above the lows for a number of years. The stock markets tend to be the first thing to bottom and we have already fallen a long way - imo we now actually need to see the economy catch up to the doom & gloom of the stock market as the market already has alot of worst case scenarios priced into share prices.

Exactly MS Tradesman. Unemployment is generally an after affect. Comapnies don't slash jobs, until it is confirmed that they are heading for trouble. Same goes with unemployment decreasing. Businesses are not going to start employing more people, until they have confirmation that things are getting better.

This explains why unemployment will peak after the market has started on its road to recovery.

Pythagerous, can you tell me how high unemployment will peak, and when?

Alphaman, predicting the peak of unemployment is like predicting the bottom of the market.

I don't know how high unemployment will get, or when the peak will take place, however I do know that the peak of unemployment will come after the market bottoms out.