Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Will You Make Money in the New Silver Bull Market ? - 13th Aug 20
Hyper-Deflation Capital Destruction And Gold & Silver - 13th Aug 20
Stock Market Correction Approaching - 13th Aug 20
Silver Took the Stairs to $21 in 2008, Took Escalator to $29 2010. Is Silver on Elevator to 120th floor today? - 13th Aug 20
President Trump Signs Additional COVID Relief – What To Expect from the Markets - 13th Aug 20
Has Gold's Upward Drive Come to an End? - 13th Aug 20
YouTuber Ads Revenue & How to Start a Career on YouTube - 13th Aug 20
Silver Notches Best Month Since 1979 - 12th Aug 20
Silver Shorts Get Squeezed Hard… What’s Next? - 12th Aug 20
A Tale of Two Precious Metal Bulls - 12th Aug 20
Stock Market Melt-Up Continues While Precious Metals Warn of Risks - 12th Aug 20
How Does the Gold Fit the Corona World? - 12th Aug 20
3 (free) ways to ride next big wave in EURUSD, USDJPY, gold, silver and more - 12th Aug 20
A Simple Way to Preserve Your Wealth Amid Uncertainty - 11th Aug 20
Precious Metals Complex Impulse Move : Where Is next Resistance? - 11th Aug 20
Gold Miners Junior Stcks Buying Spree - 11th Aug 20
Has the Fed Let the Inflation Genie Out of the Bottle? - 10th Aug 20
The Strange Food Trend That’s Making Investors Rich - 10th Aug 20
Supply & Demand For Money – The End of Inflation? - 10th Aug 20
Revisiting Our Silver and Gold Predictions – Get Ready For Higher Prices - 10th Aug 20
Storm Clouds Are Gathering for a Major Stock and Commodity Markets Downturn - 10th Aug 20
A 90-Year-Old Stock Market Investment Insight That's Relevant in 2020 - 10th Aug 20
Debt and Dollar Collapse Leading to Potential Stock Market Melt-Up, - 10th Aug 20
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Was March the True Stock Market Bottom? Here is How You Will Know Soon

Stock-Markets / Stock Index Trading Nov 28, 2009 - 05:39 PM GMT

By: Q1_Publishing

Stock-Markets

Best Financial Markets Analysis ArticleThe Associated Press calls them “fully invested bears.”

It’s the most unique phenomenon of this rally. They are the large and successful group of investors – both individual and institutional – who see the economic reality around them and are naturally bearish. However, they’re still fully invested.


That’s where we’ve all been in the past few months. We know the reality. We haven’t forgotten history will likely look back on this rally as a bear market rally. But we still have recommended buying stocks and continuing to do so until, there’s really no other way to put it, they start to go down.

Since the rally began, every week has been filled with reminders of the old trading adage – the tough trade to make (i.e. buying stocks when economy is down) is usually the better trade.

Still though, as the “fully invested bears” turn into “fully invested believers,” the most discerning investors are focusing on when this rally will end.

The Greatest Test of All

So far the rally has passed every “test” in the past few months.

Earnings seasons in the midst of a deep recession – no problem.

Bad news after bad news from the economy – no worries here.

Memories of the market decline from late 2007 through March of 2009 when the S&P 500 lost almost 68% of its value – totally forgotten.

Together they formed one of the greatest walls of worry in decades. The market has steadily climbed right over it in the past few months.

Now though, however, the markets are about to face the biggest test of all.

It’s a test that will likely determine the market’s next big move. It will signal where you’re going to need to have your money for maximum benefit. It will let us know whether the recovery is real or whether it’s the mirage we’ve expected in an otherwise desolate bear market.

The true test for this rally will be whether the market can hold on and add to its recent gains over the next few months. Here’s why.

Small Caps Lead Led the Way

Historically, small-caps lead the way when the markets recover from a cyclical bear market that coincides with a recession. 

For example, small cap stocks (tracked by the Russell 2000 index) surged 95%, 55%, and 38% from the stock market bottoms in 1982, 1990, and 2002. In those rallies the Russell 2000 beat the Russell 1000, made up by the 1000 companies with the largest market cap, by 34%, 18%, and 14%.

The same has held true for this rally. Despite a recent pull back, the Russell 2000 is still up 73% from its March lows. Meanwhile the Russell 1000 is up only 53% for a difference of 20%.

The thing is though, as the chart below reveals, the past market rallies that coincided with genuine economic recoveries were spread out over time:

As you can see, small-caps continued to post solid gains in the 10th through 12th months following the start of the rally.

That’s why the big test will be what small-cap stocks will be able to do in the next few months. As they enter the final three of the 12 months following the rally’s start (which is just a couple weeks away), they’ll be signaling the economy’s – and eventually the stock market’s – next big move.

So far, the small cap stocks are signaling that our thesis that this rally is taking its last few breaths will be proven correct.

An Ominous Sign

Over the last few weeks the major indices have continued the uptrend. Lurking underneath the new highs for the Dow and S&P 500 though is a troubling sign in small-cap stocks. The Russell 2000 has declined from a high of 603 to a low of 586.

Although I wouldn’t call a 3% decline the end of the uptrend, the underlying catalyst for the downswing is signaling more trouble ahead for small-caps.

The problem is investors are pulling their money out of small-cap stocks.

Investors in the iShares Russell 2000 ETF (NYSE:IWM), which tracks the broad small-cap index, have pulled out more than $1 billion since the start of October. To put that in perspective, investors piled in more than $2.2 billion into the ETF between July and September.

If this trend continues, it would be a very bad sign for the continued strength of the rally. It signals investors are getting nervous and want the perceived safety (that’s a topic for another day) of large-cap stocks.

The Best Move to Make Right Now

Again, there’s no way to tell exactly when the rally will end. But history, however, will provide plenty of clues for the signs to watch.

In this case, the outperformance of small-caps in all past rallies, signal the market may be priced for an economic recovery, but it’s still not expecting it.

The next few months will be a big test for the markets. The recent weakness in small-caps, however, shows the markets may be ready to fail this test.

Still though, the best move to make is to continue to be part of the “fully invested bears.”

If you’re in, take what the market gives you and ride it for all it’s worth.

If you’re looking to get in, find the sectors showing some signs of strength and where the ratio of risk to reward is steeply tilted in your favor. That way if you’re right, you’ll do really well. If you’re wrong, you’ll take a very small loss and move on.

Opportunities like these still do exist. For example, in the next Prosperity Dispatch we’ll look at a group of overlooked and undervalued stocks which were one of the hardest hit when the markets came unglued last fall. Best of all, they have just started to recover. More to come soon.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

Disclosure: Author currently holds a long position in Silvercorp Metals (SVM), physical silver, and no position in any of the other companies mentioned.

Q1 Publishing is committed to providing investors with well-researched, level-headed, no-nonsense, analysis and investment advice that will allow you to secure enduring wealth and independence.

© 2009 Copyright Q1 Publishing - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules