Monday, 9 March 2009

Lots of people calling a bottom in US equities



I am struck by the number of analysts and pundits that are using inadequate sample sizes for historical analyses in an attempt to make sense of, and situate, the current crisis into a larger context. It is quite common to find articulate discussions in blogs about the fact that stocks are cheap, that we have already reverted to the mean (what mean means exactly is not always specified), that this index is oversold etc. and then to point to data from the last 40/50 years in support of some highly confident market call.

The problem with the current situation is that it is unprecedented and even if one was to extend the historical data sample size to cover the last 100 years (where it is available) this would not really provide any reliable guidance as to where we might expect the bottom and what shape the recovery is going to be.

I commented on CNBC’s European Closing Bell last Thursday that the extremely low RSI value on the Russell 2000 index - to take just one example - not only illustrates that we are technically in uncharted territory (sorry to state the obvious) but that the likelihood of an intermediate term rally is mounting. Such a view can only be based on an intuitive probability and I am very reticent to take a firm view at this point that the end of the bear market is close at hand as some (too many?) are.

With dire economic news and further evidence of financial miscalculations on a gargantuan scale becoming almost an hourly experience this is not the time for being heroically prescient. Bear markets end when no-one is paying attention and not when plenty of analysts were making claims that the employment data released on Friday was the turning point - on what basis I failed to comprehend.

The 30 minute chart for SPY shows some late buying on Friday and some are suggesting that having hit the 680 level we are due for a bounce. Others are pointing to the possibility that the hearings in front of a House Financial Services sub-comittee this Thursday to review the issue of "mark to market" accounting could also, if the rule is suspended, at least on a temporary basis, provide an excuse for a very sharp rally.

While that is certainly a possibility it does seem that too many people are expecting a violent short squeeze. Should the committee suspend M2M there would be a relief rally but the magnitude may not be as strong as some are hoping for as my sense is that most recently the majority of the selling has not been fuelled by massive short selling but rather a continuation, even acceleration of, long liquidations from pension funds and insurance companies.

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