The Biggest Rallies Come In Bear Markets; Stocks Rally Big On Lower Volume With Leading Stocks Lagging Once Again

March 24, 2009

It was a very bullish session as the Nasdaq rallied 6.8% and the SP 500 rallied 7.1%. The bad part, which really is a bad part, is that volume was lower than the levels on Friday. Now, I know some of you have mentioned that volume was skewed by options-expiration. OK, let’s say that it is and we can’t use Friday. Well then that means we need to compare it to Thursday. If you do that, you get the same result. Volume was lower than the last options-expiration session and the last regular market session. So today was bullish on the outside but not bullish on the inside.

More evidence of this can be seen in top stocks. If we use the IBD 100 as the proxy for leading stocks (which I always have) we can see that ONCE AGAIN on a big rally in the market the IBD 100 lagged. Today the IBD 100 managed to rally only 3.5%. Now while that might sound good to you, you have to realize that back in 2003 (around the time this index started existing) leading stocks were outperforming the overall market. Not only that but volume was heavier on the days where stocks rallied than on the days when stocks fell. Right now, stocks continue to selloff on heavier volume and rally on lower volume.

Back in 2002 and 2003 you can clearly see that the market did not have an accumulation day in the rally attempt where the price was higher than 5.1%!!!!!!! While new investors might not understand this, experienced investors should. You see, when the market rallies like it did today and did to start the rally, just like EVERY OTHER RALLY IN A BEAR MARKET, you have a situation where stocks are so oversold that just a little bit of real buying kicks off a massive rally. That in turn then causes weak shorts to panic and cover into a market where most sellers are simply waiting to sell at higher prices. That allows the early rally attempts in a bear market to provide gains like 6%, 7%, or even 15% like in 2001 (I was there!).

These rallies are products of sellers stepping aside so that they can short at higher prices, which can cause one buyer to move stocks higher, and then a combination of short-covering with sellers just disappearing can then help lift the market much higher than it should go. When the sellers step aside, a big buyer shows up, and the shorts cover, indexes can rally big. Especially when the market is oversold like it was going into the recent rally.

If you want a real rally attempt to hold, you need the market to first selloff on lower volume, then you need the market to rally on higher volume with prices going up in a reasonable amount like 2% to 4%, and then the most important thing is that during this time leading stocks and leading indexes MUST be putting in stronger price gains than the overall market. If the market is making huge price gains, without leaders leading, or big volume showing up, you can almost be 100% sure that eventually you will be hitting a new low.

One of the most important things about bottoms is the attitude people have about them. In 2002 when the market was hitting the real bottom, I will tell you right now that not only was NOBODY looking for a bottom but people like me were making comments like “this market is never coming back.” LOL. Like clockwork, the bottom came right after I made those statements. However, from that bottom, not every stock setting up worked? Why? Because there was to be one more test.

That test came in March 2003 and oddly enough, even though volume was low on the pullback with accumulation on the downtrend, more people were bearish than they were in October 2002. Now, by that time, I was no longer bearish. How is that possible if I was bearish in October? Because around the October bottom, while it did look good due to volume and some stocks, it still did not exhibit the leading sectors making the biggest gains. There were great stocks setting up and breaking out but there were not enough “hot” charts to get me too excited.

Well all of that changed by March 2003. When March came, not only were there more max green BOP filled and green BOP filled charts out there with stocks looking like they were setting up in sound bases but leading stocks were pulling back less than the market and off the rally attempt and follow-through in March volume on the NYSE and Nasdaq was very heavy with the IBD 100 leading the way.

The best part about the March lows is that sentiment was more bearish, like I said, than in October. The VIX was hitting the 40 level (which shows a lot of volatility via pessimism–90 has been our recent high which is just off the charts), the put/call was well over 1.0 showing put buyers were more active, and most importantly both the AAII and II showed bears outnumbering bulls even after the initial rally off the March lows. But, even STILL, there was something even better. Everyone I talked to about stocks said they would never invest in this market “especially with this stupid president.” Well while the former Commander in Chief might not have been the sharpest tack in the group of nails, he still had more common sense about economics than this donkey does.

Right now, everyone thinks that the savior obama is going to fix what ails America with this massive spending program. However, these people do not understand that spending money that we do not have is not a smart investment. Especially when the person you are borrowing from is you and you don’t have money to borrow. There is only one thing to do. Print it! And when you make more of something that exist what happens NATURALLY to the price? I hope you know that it falls. Well, what happens to that product when more of it is made than should be and now not only does nobody want the new money being made but those that have a lot of the old money now no longer want theirs? If you think positive results are the end game of that scenario, then you really have no business in the business world as you will be BK really really quickly.

If you want to bring IPOs back to our market and have stocks rise you need to do a few things. First thing first, you MUST DECREASE TAXES AND NOT RAISE THEM. Why? Because Kennedy, Reagan, and GWB have ALL PROVEN that when you cut the cap-gains and income tax REVENUE AS A SOURCE OF INCOME FOR THE GOVERNMENT GROWS. So why in the hell are people in Washington DC pushing for higher taxes. Second, you have to get the government out of the free markets. The problem with the stock market isn’t the free market itself!! It is the government that has royally messed up this market. From FNM to FRE to AIG to LEH to EVERY OTHER COMPANY THAT THE GOVERNMENT HAS EVER TOUCHED the same outcome is the same. These companies are destroyed and bogged down with so much red tape that they become corporate zombies that are worthless to growth investors.

If you want to fix the stock market, get new issues to light, and get things back to the way they were in the 80s and 90s well then you have to completely eliminate Sarbanes Oxley (worst regulation EVER), Regulation FD (which only hurts us in Technical Analysis with gaps), and any and all other form of government intervention. Remember, it was the government and Ben Bernanke that wrote the rule that allowed BSC and LEH to leverage themselves up 35-to-1. Who takes that kind of risk? Who thinks the good times will last forever? What insanity.

I was in the heart of the internet bubble in NYC and was in the heart of the housing bubble here on Maui as people bought to flip in a few months. I saw how dangerous the internet bubble was in that it made former serious investors turn into rabid-uncontrollable-daytraders. Most of these guys lost all they had in the market. However, they still had either their job or had other savings to fall back on. The thing about the housing bubble is that most loans taken out by people were quickly spent. That left them with nothing but the money they made working day to day. When the jobs disappeared and rates went up, not only did they lose the house (like losing your stake in the stock market) but most people owed the bank and lending companies a TON OF MONEY! I know! I saw it for myself out here in Maui. I know people making less than 100k a year that were owning 3 houses at a time only for a quick flip in the name of profit. I am almost 100% sure that individual is broke now. They have to be.

The bottom line: the wealth destroyed in this housing bubble–just like I said it would in 2005–will lead to a VERY LONG BEAR market (the DJIA never fell 20% (or 25%…for some reason I can not remember right now) from Oct. 02-Oct 07–this is unheard of). This bear market was going to be long and deep, with a possibility of it lasting a decade, from the get go; smart investors knew this as we know that real estate bubbles this big always end bad. I mean heck look at Japan 1990. Where was the index then? 80,000. Where is it now in 2009? 8,000. That means in almost 20 years the Japanese stock market has moved an amazing…-90%. This is what real estate bubbles do.

But the worst thing is clearly the policies this guy in the WH is implementing. If you thought this bear market was bad last year, just you wait to see how bad it is going to get with this economic-illiterate moron junking up the free markets with his government intervention. I hate to tell you guys this but a market that goes from free to socialist gets steamrolled (HISTORY PROVES THIS!!) and markets that go from command-and-control to free do very well (ie…China Se Composite up 500% from 05-07 and leading the NYSE now since November). I can not believe that in the name of “fairness” which we were NEVER WERE GUARANTEED by our founding fathers as a God-given right. We ALL and I mean ALL have the right to life, liberty, and the pursuit of happiness. However, we are not guaranteed THE EXACT results. Which means some people will be Bill Gates and others will end up being Gandhi.

It is up to you to decide your future. Nobody is holding you back, EXCEPT THE GOVERNMENT. Do you know what this world might look like had government NEVER interfered with free humans. If this government existed back in the 1900s, we would all still be talking on landline phones, we would be parking our horse and carriages in the barn, we would be listeing to the radio (maybe), and we would be fanning ourselves off in the summer because I am sure the A/C would have never eixsted.

A socialist society zaps all the life out of a man. If you want to see examples of socialism’s success take a look at the paradise island of Cuba, or North Korea, or the former Burma, or Venezuela, or Syria, or Iran, or for you lady’s out there Saudi Arabia. Also have you ever been to New Laredo, TX? If you haven’t someone has written an article about standing on the USA side of the border and noticing how nice the city is and then on the other side you have the same town with the same possible opportunities. Too bad on their side of the fence the Mexican government has a HUGE HAND in the choices of the people of Mexico. And that is how you end up with the mess Neuvo Laredo, Mexico is.

Free countries with free markets with free people that are God fearing and honest will always outgrow and outshine the rest of the world. Until the tax rate is a fair and is a flat tax, the IRS is abolished, the size of our government is cut in half besides the military, we move our military off foreign soil, open up competition in medical care, and allow people to either opt out or invest on their own in a private savings account, I will not be bullish on this greatest nation on God’s green earth that I love so much.

Oh yeah, and yes, I do support Ron Paul, Peter Schiff, Glenn Beck, and Dr. Rand Paul. Does that make me a “militia” member? LOLOLOL. No. It makes me a patriot that LOVES MY COUNTRY TO DEATH. Give me liberty or give me death…and if you can throw in some max green BOP filled charts with volume like SWHC on Feb. 20 to now that would be really nice too. So it is, instead, give me liberty and green and max green BOP filled charts w/ strong accumulation and tight price patterns, or give me death.

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