Bear market rally works off time and price!

February 22,2016

By Gary Kaltbaum

garyk.com

@GaryKaltbaum

Fox News Business Contributor

The good news is that the bearish markets are doing their job of rinsing out some of the froth and speculation that occurs in the latter part of bull markets. Firstly, the IPO business as well as the secondary business has all but dried up. Towards the end of bull markets, an assinine amount of both come to market and typically at ridiculously high prices. (over 200 biotech companies recently came public with NO SALES ) Secondly, private equity valuations are now careening south. This is longer term good news as things head towards their norm. We suspect there is more to go.

Our last call on the market was that we thought a low was again being put in on Thursday, February 11 and Friday, February 12. So far, so good. Whenever we call for a low, we use the same language and that is: “we have no clue as to how far or how long a rally will last.” But we will know when it starts to peter out. Previous lows we have called in this bear market were on October 2 of last year (that rally lasted for about five weeks) and the low we called  on January 20 which lasted all of 10 days. This latest low came with the same markings as the others..nauseating drops, a big dose of bearishness and a good reversal! On top of that, we noticed another subtlety that new yearly lows were much higher on January 20th than when the low was hit on February 11…a positive divergence. Keep in mind, we will let the market do our bidding but everything we are seeing is telling us that eventually, recent lows will be broken.

There are still plenty of issues this market has namely only about 20% of all stocks are in good shape, which remains a horrid number. On top of that, we cannot even count on two hands the amount of sectors in good shape. To make matters worse, world markets remain in a huge downtrend (though they are rallying along with our market). Lastly, except for the most defensive of areas, there remains a clear lack of big leadership. Those areas that continue to stand out are food, beverages, tobacco, household products, utilities and reits. We don’t need to tell you that this leadership is continuing to forecast economic trouble ahead. (We are already seeing it in many numbers!) On top of that, gold and gold stocks have emerged in a big way and think this area has made a major turn after a few years of a bear market. We would suggest looking at the gold area on pullbacks.

We do believe there is more time and price for this rally but will stand ready if distribution shows up again. Bear market rallies are a normal part of bear markets. There is a simple way of knowing if we are going higher because a set-up for going higher is there. Watch these levels on a short term basis:S&P 500 1931…DOW 16,512….Russell 2000 at 1017…NASDAQ 4548.  The NASDAQ lags right now because of the same things that helped out so much in 2015 are now doing the opposite. To add one more area that needs to be watched…the XLF (S&P FINANCIAL SECTOR ETF) needs to get above 21.20. A move above all these levels continues the counter-trend rally! Conversely, a break of recent lows will lead to a lot more nausea and will again invite another round of big money selling.