A Huge Rally? Don’t Laugh…


Just because there are a dozen great reasons to hate stocks right now doesn’t necessarily mean they can’t go much higher. Not only that, the bear rally could continue for quite a while – till 2011 and beyond, even – without distorting the bearish look of the long-term charts one bit. Take a look at the monthly chart below, which shows ten years’ worth of price action in the S&P 500 futures. Nine of those years have seen a bear market brought on by the collapse of tech stocks in 2000. But notice how, when the major bear phase ended two-and-a-half years later, the S&Ps embarked on a rally that lasted five years and which recouped 80 percent of the losses. It is categorized as a bear rally nonetheless, rather than as a bull market, simply because it failed to exceed the all-time high recorded in 2000.  If a similar rally is under way now in the S&P 500, it would imply that the S&P futures, currently trading around 934, will hit 1407 by mid-2014. Our speculative price bars (in red) show how the rally would look if it reached 1407 somewhat sooner, in early 2012.


We think this is extremely unlikely, given the disastrous state of the economy. Where some optimists purport to see green shoots of recovery, we see the early stages of a collapse that eventually will be recognized as a full-blown depression. Under the circumstances, it’s more likely that, come 2014, the S&Ps will be trading closer to 400 than to 1400. Even so, we cannot rule out the possibility that the irrational surge begun in March will go significantly higher than anyone believes it “should” before sputtering out and reversing with a vengeance. The rally presumably would occur even as state and local governments slip deeper into bankruptcy and unemployment pushes above 15%.

Deaf, Dumb and Blind

While it might seem implausible that stocks could stage a gigantic rally as the economy slips into coma, we learned long ago that the two are not connected in a way that makes them act logically, much less predictably, relative to each other.  Popular wisdom has it that the stock market, all-knowing and prescient, looks ahead and sniffs out a recovery well before it becomes apparent statistically.  Our interpretation is a bit different. We see the stock market as deaf, dumb and blind; indeed, if it were a dog, it could not detect a lamb chop tied to its neck.  It is not prescience that makes stocks go up and down, we would argue, but rather the ebb and flow of fear and greed as they play out in broad cycles.

Fear seems to be nearly absent from the markets right now, the players apparently having tired of worrying about whether the numbers add up.  They don’t, of course, and the profits that banks have been reporting lately are just a mirage. But we shouldn’t be surprised if millions of investors continue to believe for yet a while that the mirage is real, especially when this point of view is the sum and substance of coverage each day by the relentless likes of CNBC and other advertising-driven purveyors of news. 

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  • Corey July 18, 2009, 12:37 pm

    Bradley, gold & silver have been so manipulated that it will boggle your mind. Do a search for Ted Butler, Israel Friedman or Jason Hommel to get some solid stats on just how dirty these “people” manipulating the markets are. There isn’t just “Da Boyz” in stocks, they are very much alive in commodities as well.

  • watcher7 July 18, 2009, 1:16 am

    I’m laughing because it has taken Rick so long to come this view. The coming expansion, signaled by the stockmarket recovery, is similar to the Roosevelt expansion of the 1930s and the Ford/Carter expansion of the 1970s. Today we are repeating the same contraction-expansion-contraction pattern.

    This expansion will eventually generate the inflation that will require interest rate rises that will precipitate the necessary debt-deflation depression providing part of the ground work for the next sustained economic/financial cycle – but this won’t come until after WW3 – despite European leading the world out of the depression, generating a pseud-type prosperity – but at least providing for her military build-up, ostensibly to combat militant Islam, due in part to a stricken America, but will be used for more sinister purposes.

  • Bradley July 17, 2009, 7:30 pm

    You know, as wacky as mctirade’s tirade seems at first glance, there are certainly parts of it which seem to hold water. Financial panics do tend to be just that, panics, and the longer the current one goes on, the less serious it seems (to many of us “untrained” investors). If you have a minute sometime Rick, could you address one of the things I have also wondered about lately, (which seems to run in a similar way as mctirade’s tirade), which is why gold hasn’t really reacted in any considerable way to all the craziness out there? One would think that, at the very least, it would have reflected in some small way the fact that, (for instance), our Treasury Secretary made comments about the possible meltdown of our entire economic system….


    Gold hasn’t reacted? It has quadrupled off bear market lows and now cruises effortlessly above $900/oz, even though nearly all other classes of investable assets have collapsed or are in a state of collapse. RA

  • Vance Pollock July 17, 2009, 7:05 pm


    Golden sachs is already about there ( SPY 1400 )… Those guys are good.

  • rantly mctirade July 17, 2009, 5:18 pm

    The Dow bottomed in July 1932. Unemployment rate peaked in 1933, declined to a low of
    around 12%+ in 1937-clearly better than in ’33 but not so great absolutely-then reversed back up. If the global debt bubble is going to truly collapse, it has the absolute perfect conditions to do so right here, right now and I certainly think it can(continue to, actually)do so. But if it’s not going to do so-collapse, that is, not slowly hiss away over many years- right now, when conditions are perfect to do so, then one needs to concede that it just may not collapse, ever.And every prior experience has shown that debt deflation collapses are rapid and violent-months to a couple years at most, not dragged out over a decade or longer-or at least a true collapse isn’t(this may be the intent of tptb, to drag it out over a couple decades so the pain is spread out and never maximized). Hiss away, inflate away, sure-debt deflation with US 1932 circumstances? Well, they’ve got 2nd and goal from the three, two time outs left and the oppositions’ lost half their starting defense to injuries-but there’s only 38 seconds(aka, about six months) left to get it done, so now that the circumstances are ideal to wrap it up, they’d better wrap it up here and now, or they never will. I think they will, and if I was to bet on it, I’d bet that it would happen. But it actually has to happen, or there needs to be a complete return to the drawing board. And the SP500 hitting 1400(or 1200, for that matter) in the upcoming year or so, with no prior move to 500 or below, means the debt deflationists fumbled on the two and the opposition recovered with one second left. Done. Upset win for fiat in the books.


    Yeah, sure. Whatever. But could you wake me, please, when I can sell my house for a quadrillion dollars. RA

  • rantly mctirade July 17, 2009, 3:18 pm

    Sorry, but if the SPX goes to 1400-or any where close-in the next 18-24 months, the unemployment rate will be under 7% and no major state or municipality will have gone bust.
    The relationship is in no way precise, and the magnitudes can certainly differ, but the major sustained directional moves in equities do indicate the general major trend moves in economic activity, with a varying(almost none to several months) lead time. See the 1932-37 bull move-economic conditions were certainly not great in any absolute sense in mid-1937, but they were just as certainly clearly better in an relative sense than those that prevailed in early 1933. If the SPX clearly exceeds a 50% retracement of its’ 07-09 decline(about 1120-so call it a 1150+ close as the ultimate line in the sand) there will be no debt deflationary collapse. The conditions for such a collapse are right here, right now,in front of us(we look to be be in a brief -maybe 6 months-interregnum now), so it either reaccelerates and goes into full bloom before year-end, or it simply will not happen-and Mr Ackerman, Prechter, etc., will need to admit a major strategic error. The conditions for a full bore debt deflation have been in place , and building even greater, throughout this full decade, so either it is under way and will reaccelerate in no more than few months-OR IT’S NOT GONNA HAPPEN. And an SPX at all near to the 1400 level
    means IT’S NOT GONNA HAPPEN-either it happens now or fiat finagling is in fact able to prevent such outcomes. Not that our likely outcome is any way ‘good’ in an absolute sense-it’s just that iTulip will prove the master of the forecast and the debt deflationists will admit error or fade into irrelevance.


    Check your history, “Rantly,” since 1930s unemployment soared after the stock market bottomed in 1932. Concerning deflation, your pseudonym is apt, since only a raving lunatic could believe that the collapse of a global debt bubble with a notional value approaching a quintillion dollars could be reversed before it has run its course. RA

  • Ayn July 17, 2009, 12:25 pm

    As usual, Rick demonstrates that he is more astute than other analysts. With thirteen trillion dollars having been pumped into the economy, there is widespread agreement that inflation must ensue. However, because of worldwide economic weakness, the inflation isn’t occurring in commodities…it is occurring in equities.

    All that newly-printed money must be parked somewhere, so price/earnings ratios are being adjusted upwards – way upwards. The process seems irrational only when incorrectly viewing the stock market as a proxy for the economy.

    With the Fed printing so many dollars – and with most competing assets suffering from a lack of institutional demand – stocks have become the place to stash all that Bernanke-generated cash. Therefore, the rising stock market is not forecasting future economic prosperity…it is reflecting current Federal Reserve policy.

    “Don’t fight the Fed”.

    That is the most important investment cliche of them all.

  • Gabriele July 17, 2009, 11:14 am

    That scenario is very likely, especially is the U.S. dollar continues devaluing!

  • robert thaler July 17, 2009, 4:12 am

    Rick, great commentary tonight. I have missed you. Ira was great but quite difficult at times to follow. His emphasis and warning about maximum pain at SPY 91 when the Market was way down last Friday was prophetic. Which brings up my question? Don’t you see an obvious nontechnical trend one week out from each OE day each month? I beleive with high probability whatever direction the trend is reverses suddenly for the week of OE. Clearly this action vaporizes hapless retail option buyers. Why not call it out each month and be prepared to trade it in a big way. I have witnessed this countless times and certainly over the last 4 months I believe.

    Anyway welcome back and I really appreciate your guidance and mentorship here. One last question. How are you positioning for the coming collapse assuming eventually that the jig will be up? How is it best to begin positioning. I have been scared out of the manipulated gold market more than once. It is frustrating. What could be the sure sign to begin buying up real metal or whatever? I have much savings in bond ladders and am not easy with it or at all confident that the morons who manage it know what their doing. They believe in ‘Wall Street’. This is the problem.
    best, Robert Thaler


    Thanks for the kind words, Robert. Concerning the option expiration “effect,” having observed it myself on and off since the early 1970s, I’m afraid it is governed by something like Heisenberg’s uncertainty principle — meaning that if you try to quantify it, it will cease to work. As to positioning for the coming collapse, while it may be possible to dodge the bullet by staying in cash, bullion and cash equivalents, leveraging the collapse will be well nigh impossible. Joe Paulson was the only guy to become a housing-collapse billionaire, but by the time his story made it to the front page of the Wall Street Journal, there were no asset classes left to short. The bank stocks may get pumped up enough to provide a second chance, but bears will have a lot more competition trying to pick the top. RA

  • cameroni July 17, 2009, 1:11 am

    Well said Rick. The public too is tired of hearing the siren call of disaster. They are fatigued by the negative commentary of doom-sayers and don’t believe it anymore. Wolf! has been cried too many times and the public is tired of responding. That is a sign that more investors will let their guard down and rejoin the party, not wanting to miss out on the markets growth that they have shied away from to date. And there is a powerful primordial tendency in people to desire to embrace good news over bad. That in itself almost assures a market driven higher come fall as late entrants pile back into the market in droves. I sense it will not end well. In the meantime, I will go with the trend but use all tools available to keep my risk to the minimum. I don’t want to get caught short again.

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