Hussman has a good article up: http://www.hussmanfunds.com/rsi/rallyvolume.htm
The gist is that bear market rallies differ from true bull market rallies in several important ways. Bull market rallies:
- Tend to NOT be explosive, though there are exceptions
- Typically exhibit broad market participation (i.e. increased volume)
- The more explosive the rally, the more broad participation there is
Quote Hussman:
Specifically, bear markets don't typically end in a crescendo of fear and panic, but more often on a feeling of “despair and disillusionment,” while strong bull markets tend to feature heavy trading volume.
If you were around in 1974 (I wasn't, but I hear from people who were) ... it was a HORRIBLE time. The markets were horrendous with no end in sight. Everyone knew "the right thing to do" was to pull evert last cent from the stock market (if you had any more) and put it into commodities - the whole oil crisis and all.
Telegraph quoted:
Speaking at the time, Jim Slater, the founder of the boom-to-busted Slater Walker empire, summed up the nation's mood when he said people needed just three things - baked beans, Krugerrands and a gun to protect your family.
"It was that desperate," says Marks, who was a dealer with stock-jobber Smith Brothers in 1974.
So desperate, in fact, that Winterflood, then a stock-jobber at Bisgood Bishop & Co, was selling bric-a-brac at the weekends to supplement his salary. "We were really in the doldrums. I personally had tinned food in the attic and Krugerrands buried in the garden. I'm serious."
Unlike the current market, not only were volumes thin to non-existent, but the ordinary man on the street was relatively unaffected. "Then, there wasn't the big pension industry we have today," says Winterflood .
"This has hurt nearly everybody. In a way it is worse, because the man in the street has lost confidence in the captains of industry."
Speaking about the 1974 bear market, NYtimes made a remarkably prescient call in the nadir that was the end of 2002.
The rally we are in, in contrast, shows a huge percentage move with comparatively little broad market participation; this is still a trader's market.
John Maudlin commented that the key would be earnings - not bank earnings, since no one trusts them anymore, but broad swaths of positive earnings from key industrial conglomerates (think old boring companies like Alcoa or J&J). Alcoa flunked, and I'm not sure the other big conglomerates will do well also.
Here are some historical charts courtesy of globalfindata.com:
Dow Jones, 1972-1977:
Nasdaq Tech bottom:
Nasdaq was a bit different in that the first upmove occurred on lower than average volume; however, the upmove was also small (not nearly 30% as we got).
This graph from Hussman's page is perhaps most telling:
Where's the broad institutional support? Talking heads don't provide support; real money does.
And what can we expect from this bounce?
Oversold bounces: Average cumulative S&P 500 % returns 1940-2007 based on starting % below 50-week smoothing (time scale measured in weeks):
[x axis is weeks, y axis is cumulative return]
Notice how rallies under 10 to 15 percent have a tendency to persist, while extreme rallies tend to reverse. Coincidentally we just finished week 6 of the recent bear market rally.
The bottom line: Even if you do believe in the rally, now is a horrible time to buy. If you do believe, best to wait for the market to correct the recent unimaginably huge move and get in at a discount. You see, rocket ships need fuel to run ... and fuel is in short supply these days - still.
