When Will The Bear Rally Fizzle?

I am back after a fascinating tour of Eastern Europe about which I will share details in a few days. A new dimension will also be added soon to the blog to give a deeper and broader perspective of current financial and economic events.

For now we will review the present Bear Market rally.

Chart of the Day

For some perspective on the current stock market rally and how it compares the 1929-1932 bear market (which also included bank failures, bankruptcies, severe stock market declines, etc.), today's chart illustrates the duration (calendar days) and magnitude (percent gain) of all significant Dow rallies that occurred during the 1929-1932 bear market (solid blue dots). For example, the bear market rally that began in November 1929 lasted 155 calendar days and resulted in a gain of 48%. As today's chart illustrates, the duration and magnitude of the current Dow rally (hollow blue dot labeled you are here) is greater than any that occurred during the 1929-1932 bear market.

As seen from the graph, we are in new, uncharted territory with the current Bear Market rally. While the rally may last a few weeks longer, we anticipate it will be followed by a more severe correction than most commentators have estimated. One early indicator that we are near the end of the rally, is the upward movement in VIX, the volatility indicator. Bloomberg reported the following today:

The VIX, as the Chicago Board Options Exchange Volatility Index is known, jumped 24 percent to 30.69 for its biggest gain since Oct. 22, 2008.

As the reader may recall from last fall and winter, VIX topped out around 80 and has since declined to a the more normal 24 to 27 range recently. We also note that we are getting closer to the 50 EMA of 76.77 on the US dollar index.

IF, we close above the 50 day EMA for several days on the US dollar index, it is our estimation that the rally is over and there will be sideways movement in the market for a short time and then a sharp correction on "bad news" that scares nervous investors away from risky assets and toward treasuries and bonds. We noted a couple of days ago that Nouriel Roubini has joined our ranks in looking for a rebound in the US dollar. As Andy Xie mentioned in a piece he wrote for Caijing, the US trade deficit has halved due to rising savings and "When the dollar reverses, the short squeeze could cause a global crisis."

This would then be the trigger for the next stock market collapse.


  1. "the short squeeze could cause a global crisis."

    How severe will this global crisis be, PW? Is it the dollar collapse that many people fear?

  2. This question if fundamental in understanding the next 12 months or so. I will post on the global crisis/dollar collapse shortly.


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