End of the Bear Market Rally?

by JDH on April 4, 2009

I very rarely get sick, but when I do it knocks me out completely. I was feeling great until about 8:00 pm on Thursday night, and then that was it. From about 9:00 pm Thursday until 9:00 am Friday morning I was knelt before the great white porcelain throne, every three hours, until I had nothing more to give. Friday was spent sleeping, until I awoke from my slumbers around 5:00 am Saturday morning, where I know sit, upright for the first time in a day, at my computer, surveying the damage.

The upside of being sick (from food poisoning or the flu, I’m not sure which) is that I spent a day without watching CNBC, or hearing any market commentary whatsoever. The good news for each of you is that I will keep my comments brief today, since I’m not sure how long I will last before I crash again.

The first order of business today is to give the results of our first ever 2009 Predictions contest. At the start of the year some of you emailed in your predictions for the price of Gold and the Dow at the end of each quarter. The consensus estimate was that on March 31, 2009 the price of gold would be $1,026 per ounce, and the Dow would be trading at 9,107. In fact, gold was trading at around $919, and the Dow closed the quarter at 7,609, so we were high on the price of gold, and way too optimistic on the Dow.

“Closest to the pin” awards go to Croaker, who had the gold price at $950 per ounce, which means that everyone in the survey was too optimistic. Good job Croaker. I predicted gold would be $1,200 per ounce, so I was not even in the ballpark.

As for the Dow, the best guess was by Designer, who predicted a Dow level of 7,900, which turns out to have been a very good guess. In fact on both April 2 and April 3 the Dow did touch the 7,900 mark, so that was a very good guess. I predicted Dow of 8,000, which was also hit on April 2 and April 3, so I too will take some credit for being close.

What does this all mean? Nothing. Guess are fine, but unless we guessed correctly and put our money in the right place, we didn’t make any money. My portfolio on the year was up 3.5% on March 31, so although my guesses were close, they didn’t translate into great riches, which of course is the objective here.

Before I get to where we go from here, I would like to pick up on some comments made over on the Forum. A number of you have commented on the ETFs. Adiandunn, re-appearing after a long absence, commented that “almost any leveraged ETF is a bad long term investment.” Richmanch made the point that, and I paraphrase, “while this is a bear market rally, not the start of new bull, there may be money to be made on the upside, short term.

I agree. Leveraged ETFs are a short term gamble, not a long term multi year investment. Leverage helps you on the way up, and kills you on the way down, so you have to take your profits when you can get them. In fact, after a long absence, I even posted on the Forum this week, when I commented that I had sold my shorts (specifically RSW – Rydex Inverse 2X S&P ETF) and placed a small bet in FAS – Financial Bull 3X Shares. The long-anticipated introduction of the revised mark to market rules caused a bump up in the general markets, so being out of the shorts made sense. I only held the FAS for two days, took the profit, and sold.

So where do we go from here?

I believe that this bear market rally will soon run out of legs. I have no idea if that will happen in April, or a bit later, but the Dow has bounced from 6,547 on March 9 to 8,017 on April 3, a gain of 22%. That’s a big gain for less than a month, and given that the RSI is now over 60, a pullback is inevitable (unless you actually believe that a 20% gain constitutes a new bull market; I don’t).

I’m not going short now, but I am holding cash (46% of my portfolio, at the moment).

Gold has been beaten down this week, and the case can be made that we are in a downtrend. However, since the October lows we have made a series of higher lows, and with an RSI down to 39.88 I don’t think the correction will last much longer. I hope the $875 levels hold; if not, we could see a fall to the $850 or even $800 range. If that happens, I’ll be adding to my positions. In fact, I will probably place some stink bids this week to increase my holdings in the event that we have an unanticipated blip to lower levels.

Longer term, unemployment is still high, personal debt levels are high, bankruptcy rates are increasing, and all governments are spending like drunken sailors, which is inflationary and very good for gold.

Those are my thoughts for this week; I’m going back to bed; thanks for reading; see you next week.