Jeff DeGraaf, ISI head of technical analysis says Tuesday’s rally is far more credible than the past rally a couple weeks ago.
“This is the 6th best rally in the S&P since 1925,” he says. “If you look at volume and breadth it makes me more bullish than I’ve been in quite a while.”
With sentiment so bearish, “we have a condition that would set itself up for some type of mean reversion probably to 1100,” he says.
Short assets vs. assets shows that there is far more money betting the market down than up, and today’s rally is more reliable than the most recent one.
As a result, “the best market strategy right now is a call spread on the S&P selling the upside around 1100,” he concludes.
Jeff deGraaf, Head of Technical Analysis at ISI, who appeared on CNBC’s On The Money today, suggests that we are merely in the 5th inning of this bear market, or about 250 days into a typical 600-day bear market downturn. Usually, the first part of the bear market consists of the unwind from the previous boom cycle. He suggests that we still have yet to see the second part of the downturn.
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deGraaf made the point that if you’re a long-term position oriented investor, this is probably [only]the 5th inning of the bear market. If you’re a short term tactical investor, there’s been enough things washed out that you could get 150-200 “handle” rally.
The burning question that remains to be answered is, “How much like other bear market patterns in the last 40 years is this one?”
Here are the charts deGraaf discussed:
At this stage, 57% of S&P 500 stocks have now made 52-week lows.
Based on the 1973-1974 bear market deGraaf points out where we are in terms of the timeline.
Then, he makes a comparison to the 2001-2002 bear market, again pointing out where we are in terms of that one.
“What you need from our standpoint to tactically be a bull is for the market to send you a message that it wants to go up,” said deGraaf.
Here are some things to look for:
Market Breadth
[Between] 5 to 1 and 3 to 1 advance/decline ratios
Preferably, with the market doing it on its own volition,
Without government intervention, and
Not contrived by government policy.
Following deGraaf’s comments, John Najarian pointed out that the CBOE VIX (Volatility Index) is signalling a great likelihood of a great number of 35 point plus days (down 60 pts. today) on the S&P 500 and more 500+ point days in the Dow, to the upside (or downside). Currently the VIX index has reached an all time highs in the mid 50% range.
The relative strength of the US dollar is promising too, but getting to a stronger dollar on the basis of the weakening Euro in the midst of the vaporization of some large European banks, like Fortis, will be painful, to say the least, as resultant losses are forcing more liquidations in equity markets during the last few wildly volatile trading sessions.
Is the bottom in yet? Not likely, and not for some time yet.
July 1, 2008 - (courtesy of Bespoke Investment Group) If any one tries to tell you differently, all you need to do is show them the chart below. As last week’s trading illustrates, every time oil went up, stocks went down, and every time oil pulled back, the market gained steam.
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