oftwominds-Charles Hugh Smith

Coming Soon to a Market Near You: A Huge "Obama Spring" Rally

My friends have already heard about the "Obama Spring" I see coming to a market near you: a huge rally of epic proportions, powered by the euphoria of a new can-do insider-staffed Administration coupled with a sense that the "worst is over" in the financial markets/credit collapse debacle.

But wait--does this mean all the structural problems I've been highlighting for three years have vanished? Of course not; the Coming Depression is still on its inexorable way. But just as the stock market rallied huge in 1930 and 1973, we're due for a monster rally that blows the doors off the Bears' dour certainty.

But isn't the stock market based on the fundamentals of the economy? Hahahaha, please don't make me laugh this hard--I might hurt myself. As noted here many times: the markets have only the thinnest connections to reality--and that's even without massive intervention/manipulation. Markets reflect the emotions of the participants--and nothing else.
Any other connection--price-earnings ratios and all the rest--is illusory.

That's why you can be screaming that your favorite stock has a low PE while it continues plummeting to new lows. And it's also why a "momo favorite" like Google can climb from $250 to $750/share regardless of its high PE--and why it can fall from grace ($750) back to $250/share.

So with Mr. Obama about to take controls of the Presidency with a team of experienced insiders and an agenda of "getting America working again"--what mood do you reckon will seize the country? Dour gloom? Heck no--regardless of ideology and who they voted for, Americans will be increasingly euphoric. Want proof? Even Karl Rove had something positive to say about Obama's team.

That's so bullish, it's actually frightening.

But before going on, please read (or re-read) the HUGE GIANT BIG FAT DISCLAIMER below, which reminds you that 1) nothing here is investment advice 2) this is free, so you get what you pay for and 3) this is an amateur's opinion and nothing else.

It has been my observation that bearish gloom can only last so long before the human spirit demands an injection of hope. We are now overdue for such an injection. But more importantly, we're not just getting a run-of-the-mill injection of the good stuff--it's way beyond mere alkaloid. We're going to get the pure Americana high of "yes, we can."

This is the real deal, stuff so powerful it puts Twinkies and cocaine to shame. Americans are optimistic by nature, and they like to think it's a new day every day; yes, our financial sector blew up, OK, so did housing, but dang it, "yes, we can."

I called for the rally about 5 weeks ago and was (as usual) early: A Contrarian's Call for a Major Rally (October 25, 2008). But if you bought oil stocks as I did at that time, you may well be poised to enjoy some mighty-fine returns on your willingness to ignore the gloomy "certainty."

I no longer get married to any market view. "Should" the market go down because our economy has structural flaws that will bring it to its knees? I have no idea. The market was "surprised" by the collapse of the risk-riddled financial sector we all have anticipated for three long years of phony prosperity, so we can easily anticipate the market being "surprised" next year when long-term interest rates suddenly zoom up, ending the supposedly "permanent era of low interest rates."

And the market will also be "surprised" when the wheels fall off the Obama Spring rally in April or May.

But let's not get ahead of the rally we're about to enjoy for a few months; we can always put on our Bear suits again in April (they will have aired out a bit by then--and a good thing.)
Let's first look at how the market can gyrate wildly in a protracted Bear market--say, the 1970s:

Please go to www.oftwominds.com/blog.html to view the charts:

We can quibble about exactly how many sharp moves up and down are depicted here, but I count 12 huge legs up or down in the course of 12 years, each of which offered traders vast opportunities for immense profits either long and short. And with the markets much more volatile now (recall that 80% of the trades on the NYSE are "black box" trades made by computers programmed to squeeze a dime profit out of huge volumes) then we can safely guess that we may have 20+ large swings in the next 12 years of Bear Market.

As always, I base my views on the charts--like this 10-year view of the Dow Jones Industrial Average:

In a bloodless analysis, the extremes in ADX (trend) and MACD really pop out. As the cliche has it, "nothing goes up or down in a straight line."

Technicians will be referring to a variety of targets--Elliot Wave, fibonaccis, previous levels of resistance/support, and so on. The ones indicated on the chart seem like the most obvious ones:

1. the 50% retrace of the entire 2002-2007 Bull market (10,725 or so)
2. the previous 2000 high of 11,723
3. the shoulder of the "head and shoulders top" around 12,800
4. the high around 14,000

None of these targets is a "sure bet" of course but the breaching of each one sets the stage for the next one to fall--until such time as a key level proves to be unbreakable resistance. Then as technicians we plan our sells and our move to the short side. Readers' Journal readers commentaries updated: Readers' commentaries 11/27/08.

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