What an omen! Can 666 be the low on the SPX?April 3, 2009 — 1,440 views
On March 6th the S&P traded as low as 666. This was a new 12 year low and since then it has rallied higher by over 170 points, trading as high as 845. Many so called market mavens have said the lows are in for the year. There is even talk that these are generational lows and the opportunity of a lifetime. While the market was extremely oversold in early March and a bounce was due, can we call this the final bottom? While we are technical traders and just follow price action, pattern, and time, we will look at the underlying financial problems and see what we can uncover.
Through the year 2000, the market has weathered many storms. In a recent article we uncovered the past bear markets that this current bear market resembled. The cause of the bear market was simple and the same cause in both cases. In 1873 the market went into a recession/depression simply because there was too much easy money and credit was given to anyone with a pulse. The same happened in 1929 as 'the great depression' took hold. At that time the public was able to buy stocks with 10% margin. Today the market has a rule called Reg T which is the ability to buy stocks with 50% margin. Then why did this problem occur today? Have we not learned from past history? Apparently not.
Many can argue the case that this market has been building this bubble since 1982. This is the date since the bull market started. The market has been through many turbulent times before such as
1. junk bonds
2. multiple wars
3. Long Term Capital crisis
4. the tech bubble
5. corporate scandals such as Enron, MCI Worldcom, Adelphia, Global Crossing, accounting scandals
6. 40:1 leverage by the large brokerage firms such as Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs, Morgan Stanley and others
7. derivative products that cannot be priced
8. credit rating agencies that rated AAA when they should have been low grade
9. housing and mortgage bubble.
10. the savings and loan scandal
This and more has all taken place over the last 20 years and the market has always bounced back and moved higher with only a few bear phases.
It is a wonder that the market usually survives every storm until credit becomes too loose. It is easy to blame the bankers for lending to anyone that can hold a pen. Perhaps, we should blame the people who took the loans in the first place. Why would anyone think that they could buy a $500,000 home on a $50,000 annual salary? At least this was not difficult to figure out how the economy got this way. Everyone is too blame for this crisis and the cause is simple. It is greed. Greed is the second strongest of all the human emotions next to fear. Yes, fear is the first and strongest. That is why we see the market generally rise slowly and decline fast. Hence the saying, 'the market takes the stairs up and the elevator down'.
Since the United States was founded, we are seeing the most government intervention in the private business sector. A fair case can be made that the key to capitalism and the free market system was survival of the fittest. The ability for corporations to fail and new innovation to emerge and create competition. This time around companies are being handpicked that will be bailed out and others are left to fail. What criteria must a company have to be saved by the government? Is it just sheer size? Companies such as AIG, Citibank, Fannie Mae, Freddie Mac, and others are allowed to get a bailout. Who pays for these bailouts? The unemployment rate is increasing by the day globally. This question remains unanswered as the taxpayer pays again.
So let’s talk technical’s since that is what we do. If the lows are 666 on the S&P for the time being, how high can this rally go? Well like any bear market rally it can be sharp and violent as we have seen to the upside. In March 2008 the market rallied after the Bear Stearns collapse into late May. The low on the S&P was 1257 and the S&P rallied up to 1440. This was a 183 point rally. Now March 2009 the market has rallied 180 points in three weeks. These two rally numbers look distinctly similar. It is still uncertain as to how far this rally can last however. It is amazing how fast the media is saying the bear market is over considering it was over 20 years of bubbles and excess that has been capped by easy and loose credit.
Enjoy the bear market rally while it lasts. Yes, we hope it lasts a while just as it did in 1929. Back then the market saw a six month rise before ultimately making new lows. Remember the market is like the child game musical chairs. Bear market rallies will entice the last dollar from the shoeshine boy before resuming their trend down. Mark Twain always said history doesn't repeat itself exactly, however it does often rhyme. Don't be the one left without a chair when the music stops playing.
Source: Nicholas Santiago
The Leader In Market Technical Guidance