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Annual Review: March 2009 Highlights at Trader’s Narrative

Annual Review: March 2009 Highlights

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To better understand where we are and where we’re headed, I’m reviewing my analysis of the past year. In case you missed them, here are January’s review and here February’s.

March was a pivotal month in almost every market, but that is only obvious in hindsight. There were many signs we can point to now that were easily discounted as we lived through the market’s gyrations 10 months ago. Considering everything, I did a very good job of highlighting many reasons why we were about to, or had already seen, a significant inflection point.

As you’ll read below, based on historical patterns, sentiment, ’smart money’ traders and other indicators, I argued again and again that this was a time to go long. The only thing that threw me off was the confusing behavior of the options market in this pivotal month.

To be honest, this is something that still confuses the heck out of me and perhaps I’ll never be able to have a satisfactory answer. For some reason, all the usual option metrics totally broke down and failed to flag March as what it was. If you know what I mean and have a clue, please enlighten the rest of us who don’t.

In any case, here are some highlights from my analysis and commentary for March 2009:

  • Are We Headed Back To 1980?
    At the start of the month, things looked grim as I looked at the possibility of a massive double top in the S&P 500 index which would take us down a terrifying abyss. However, sentiment, as usual, offered a reality check. The cult of “buy and hold” had suddenly given away to “time the market” - a sure sign of an inflection point.
  • Inflation Adjusted Chart Of S&P 500
    A very long term (inflation adjusted) perspective of the stock market showed support and resistance levels that were at once familiar but yet surprising. We were fast approaching previous resistance seen last in the 1960’s and the 1990’s (now support of course).
  • Market Breadth: Down, But Not Out
    While the market made new lows, several measures of market breadth were showing marks of exhaustion. That is, while the market proxy was lower, the average stock was trading stronger in March than it had in November 2008.
  • Sentiment Overview: Week Of March 6th, 2009
    The AAII sentiment survey for the first week of March “shows what can only be describe as total and utter capitulation”: 70% bearish & only 19% bullish. This was a huge contrarian alarm blaring in the ear of any trader astute enough to listen. But confoundedly, option traders showed no similar signs of capitulation and if anything, there was just a tad too much call buying.
  • Revisiting The Long Term Bullish Case For Stocks
    Back in late November, I showed a long term chart of the 10 year rolling returns for the S&P 500. It traced stock returns through peaks and valleys over decades and suggested that we were very close to the bottom of a valley. If you ignored history, I pointed out that many smart traders were suddenly bullish: Buffett, Kass, Grantham, etc.
  • (Reverse) Parabolic: The Philadelphia Banking Index
    In March, no sector was as hated as the banks. But if you looked at the chart of the BKX, it had gone (reverse) parabolic. This simple but powerful technical pattern was telling chart watchers that the trend was about to exhaust itself. Thanks to hindsight, we know it did indeed.
  • Jeremy Grantham: Reinvesting When Terrified
    In his quarterly letter to clients, Grantham shared his dilemma in being either too early or too late to get back in the market. What he wasn’t debating was that it was time to reinvest. This was a huge tell as Grantham had been one of the most vocal and successful bears.
  • Bear Trap Is Set - But Will It Close?
    I went back and compared the start of the 1980 super-bull market that started in August 1982 to the market in mid March. In both cases, prices had broken support only to sharply recover and go higher. This is what is known as a ‘bear trap’ as traders who had bet on declining prices suddenly found themselves hemorrhaging (and as they acknowledged their error and bought to get out of the trade, only propelled prices even higher).
  • Another Reason We’ve Seen The Market Low
    On the last day of March, I shared yet another reason why the recent low was a significant bottom: the huge gap between price and the long term trend. At its low, the S&P 500 traded an unheard of 39.8% below its 200 day moving average: “it is difficult to argue that what we have just witnessed isn’t but a monumental and rare market event that has characterized important turning points in the past.”

Jan - February - April - May - June - July - Aug - Sept - October - November - December

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4 Responses to “Annual Review: March 2009 Highlights”  

  1. 1 Jimmy

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    very good analysis! yes, there were important indications of an intermediate term bottom (if not a long term bottom) was pending/near. What’s surprising now is that this rally has gone on longer than expected even for those, like me, who got it right that a bottom was occurring at that time in early March. Only recent memory I (along with others) can compare this to is to the recent similarity to the March 2003 bottom. Just like in early December 2003, there were weeks of internal weakness/divergences but then got a big Santa Claus rally into 2004…this time we got internal weakness a month earlier and it looks like we could be getting an early SC rally. That could mean an IT top would occur earlier this time than the one in early 2004.

  2. 2 TC

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    I agree that transition whose end finally came in March ‘09 was evident for all the reasons you cite. I would note, however, that, per market breadth, cumulative advance-decline lines for both NYSE and NASDAQ set new lows in March. No divergence occurred, thus suggesting longevity of March bottom is questionable.

    Presently, cumulative A-D performance off bottom relative to index performance likewise suggests we are in the midst of a counter-trend rally quite likely doomed to result in a round of selling dwarfing last year’s. The markings of distribution are being revealed. Likewise such “animal spirits” as would bid up a wide swath of NASDAQ-listed issues is lacking. This appears icing on the cake to a bearish analyst like myself.

    Per your options action quandary … consider elevated call buying that accompanied much of the market’s action leading to March bottom (and particularly thereafter) as the carrot complementing the stick of a vested interest — a “Plunge Protection Team,” so to speak (similarly intentioned as that which developed in the late 1920s and early 1930s, and probably equally as unlikely to save equities from disaster) — whose initial support operation throughout February and March (buying up shares and thus elevating volume as a result), was accompanied with “speculative” call buying, and then followed by disciplined restraint in selling back ultimately unwanted long positions acquired during this time. Subsequently, this group sold covered calls to facilitate an averaging up in sale proceeds of unwanted long positions to such weak hands who with time’s passage (and much persuasion from a Goebbels-like, unpenetrating financial press) could be expected to exercise call options purchased from said PPT, and in so doing take unwanted shares off their hands.

    Surely, much as the lender of last resort was forced to act, so too the buyer of last resort in the private sector (supporting market makers). Now, if both entities had not done so much to hang themselves with the rope spun for decades promoting all things globalization, this support effort might succeed indefinitely were all potential trouble spots, in fact, reasonably contained. Problem is, however, we are dealing with a chain stretching all across the globe that is only as strong as its weakest link. Many vulnerabilities lie outside the influence of Western lenders of last resort and private sector PPTs. This presents a problem to anyone thinking the worst has passed.

    So, in my opinion (and I believe a cadre of basic technical measures likewise confirms this) what has been accomplished this year is a demonstration of Wall Street’s magnanimous side (something most do not believe exists!): an opportunity given to the little guy to exercise every last bit of CYA necessary to weather any coming category 5 financial storm likely to develop.

    Yet judging by the solid majority of dip sticks writing investment newsletters who presently are NOT bearish, those weakened by last year’s disaster more likely are being persuaded to bend over and do their best Chip Diller saying, “Thank you, sir, may I have another!”

  3. 3 Babak

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    Jimmy, absolutely. It is easy to forget that this rally happened in spite of a chorus of boo’s. Or maybe that was the proverbial “wall of worry”. Very, very, very few people thought it would rise as much as it did in such a short time. I certainly didn’t!

  4. 4 Babak

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    TC, thanks for your thoughts but I have a few issues. First of all, cumulative AD is notoriously misleading. I’ve tried to put this myth to rest several times. I’ve never before heard of or seen cumulative AD relative to index (a ratio?) but suspect it is equally misleading since it includes cumulative AD.

    re options, are you claiming that it was the “PPT”? So, they remained on the sidelines until March and then suddenly came in via the options markets and bought calls to prop up the market? I don’t see how that would be possible for so many reasons. Don’t option market makers sell short stocks that they’ve sold calls on? so every call is counter-balanced by a short position… which pushes prices lower… or am I missing something? And why not use futures? wouldn’t that be more effective? and why would the PPT stay on the sidelines through devastating declines only to step in then?

    It is an interesting theory, I just don’t think you’ve explained it well here.

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