It certainly looks like the oversold rally we've been looking for is now underway. The question now is whether this is a bear market rally that will eventually roll over or is this the start of a new bull market.I suspect this is probably not the start of a new bull market and here's why.
First off bull markets don't start with 900 point rallies.
Second, we still have what so far appears to be a very left translated 4 year cycle. This is still suggesting that we will see one of the worst stock market declines in history after this rally runs its course.
The extreme nature of the recent crash suggests that the coming rally should be a doosie. I fully expect to recover the 200 DMA. I also expect this rally to last 3-5 months. So I have no doubt that we will at some point see investors become extremely complacent again. That's the point at which the bear will come back.
Third, as of Friday, Lowry's selling pressure was at multi year highs. Never in the 75 year history of Lowry's service has the market made a final bear market low sooner than one month after selling pressure has started to decline. As I noted, as of one day ago selling pressure was increasing. I suspect we will now see selling pressure decrease a bit but I really doubt buying pressure is going to increase much. Smart institutional money will likely use this rally to unload more stock just like they've done on every other rally so far in this bear market.
If this is the rally that separates the first and second phase of the bear market and I think it probably is, then the real damage will be done when this rally finally rolls over. The next phase of the bear market will probably take the market down to levels that no one can conceive at this point.
The powers that be may have temporarily saved the financial system but they can not turn the global recession around in it's tracks. Once the euphoria of this rally wears off the markets are still going to have to deal with declining earnings. As long as earnings are dropping P/E ratios will be rising. Contrary to what many in the media have been saying the market still wasn't cheap even at 840. Trailing P/E's were still running at around 13 which is only slightly below average. Of course if 3rd quarter earnings decline that P/E ratio will be higher.
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