Another bubble in the making?

May 20, 2009 — 1,352 views  
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The market has staged a very impressive rally since the March 6th low. At that time the S&P bottomed at 666 and is now around 900. This massive rally has occurred in just two and a half months. Some talking heads in the media are now saying that this is the start of the next bull market. Many call a move of 20% or more a bull market and perhaps by that definition they are correct. However, the decline seen last year should then be called a 'mega bear' as the S&P went from 1576 to 666 in just 18 months.

Some market technicians like myself, that follow cycles, were looking for a rally in the market in the month of March. It is very common to see major reversals or turning points in the months of March and October. Even last March (2008), as Bear Stearns collapsed it was the buying opportunity of a lifetime. The S&P bottomed at 1256 and rallied into May 19th, hitting a high of 1440. This current rally has been much greater in price and about average in time. The difference with this rally is that this market has not had much of a pullback off this meteoric rise. What is making this rally so much different from last year? Obviously stimulus and government intervention.

In 2001, the Federal Reserve lowered rates to 1% as the market was in a deep bear market from the tech bubble and the 911 tragedy. This sparked a housing boom that created countless jobs. The jobs created were in construction, banking, real estate sales, home flipping, and even trickled down to the local sandwich shop. This also spurred the home owners to use there home equity like an endless ATM machine. The bubble created was most likely the biggest created in over 100 years. The bust now is mirroring the Great Depression.

Many traders know that the markets are ruled by emotion. The late Jesse Livermore used to say that there are four main emotions that control the markets. They are fear, greed, hope, and ignorance. In October 2007 when the market was at its all time high, it is safe that we saw a lot of greed and a lot of ignorance. In 2008 we did see a whole lot of fear as the markets fell off a cliff. Fear is the strongest of all the human emotions and that is why markets drop so quickly as opposed to moving higher. Then, there is the emotion of hope. Could this market now be in hope mode?

The Fed has lowered the fed funds rate to 0-1%. They are also buying almost a trillion dollars worth of mortgage backed securities. Working with FRB, the U.S. Treasury has created the Toxic Asset Relief Program (TARP). The accounting rules such as 'mark to market' accounting have been changed giving the banks profitable earnings instead of massive losses. The SEC has changed many rules regarding short selling and regulation. All of this and more has been done giving the markets hope. Hope has stocks up huge since the lows in March.

In 1930, during the Great Depression, many similar rules and efforts took place as well. At that time, the market bounced for six months off the lows retracing about 50% of the total fall made from the 1929 high. However, soon after, the market collapsed again. It made new lows and did not bottom until mid 1932. The irony is back then, the Republican party was completely swept out of office as is the case this time around. Can the U.S. re-inflate the markets or just create another commodity bubble? Are the job losses going to stop? Will new jobs emerge to replace the lost ones? Will it be different this time around? These are questions that still need to be answered. As for now there is just hope. My bet is with history.

Source: Nicholas Santiago
The Leader In Market Technical Guidance