Posted on May 15, 2009 - by Jeflin

Stock Market Rally: First Stage Of A Primary Bull Trend?

Photo by mvhargan

“Sell in May and go away” may not be relevant this year. For a month commonly associated with disinterested stock market activity, we have seen a 36% jump in the benchmark S&P 500 from March’s 12-year low.

Economic reports turn out better than expected, swine flu has been downgraded to a harmless entity, and US banks have passed the stress test. No wonder, investors are seeing green shoots everywhere, even among a pile of stinking, toxic shit.

Speaking of the stress test, there are much debates on the methodologies, “adverse” assumptions or suitability of a 25-to-l leverage ratio for tier-1 capital, but it is undeniable that uncertainty has been eliminated substantially.

Since the test procedures are out in public, investors can extrapolate their own worst case scenarios based on current recommendations and findings. Unless the Treasury Department has prepetrated a fraud out of this stress test, it is the most authoritative guide to date.

Judging by the resilience in the stock market rally, the Obama administration has skilfully orchestrated leaks and pre-release discussions with banks to test market reaction. Come to think of it, there is no way the US government will let the banks fail, not when they have unwittingly become a major, if not the biggest, shareholder vested in the banks’ profitability. The auto industry will have given an arm to be in this position but apparently, life is full of inequality.

In the short term, technical indicators, measures of confidence, and volatility all suggest that the stock market rally could persist. We are now either in the last stage of the bear reign or the first wave of a primary bull market.

A representative measure of a stock market rally is the S&P 500 lying less than 50 points away from the 200-day moving average. If the S&P 500 closes above this closely watched metric (something not seen since December 2007), the trend reversal from bearish to bullish cannot be ignored.

The VIX index also slid to its lowest level since the collapse in September 2008 of the US investment bank Lehman Brothers. With market volatility abating, investors have grown accustomed to the effects of a tight credit market and are betting that the worst of the recession is over. They believe that a renewed stock market rally is taking root. Read more…

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1. Don’t Be Suckered By Stock Market Rally In 2010
2. Buy On The Dips For Next Phase of Stock Market Rally
3. Get Real On The Economic Recovery And Stock Market Rally