Matt Trivisonno’s Blog

During the past few days, I have been comparing the S&P 500 to a similar period 7 years ago, in 2001, where a bear-market rally had traders convinced that the worst was over. That meme (idea) appears to have spread rapidly and now appears in this week’s Barron’s.

Alan Abelson writes in his influential column:

“In March 2001, the Nasdaq was off by more than 70% from its peak set only a scant year earlier. Investors became increasingly convinced that lightning had already struck, the landscape was littered with shattered stocks and a turn had to be in the offing. Were they ever wrong! Instead, recession reared its ugly head, profits posted their biggest declines since the 1920s and Nasdaq fell another 50% before hitting bottom deep into 2002.”

As I posted yesterday, next week should begin with large numbers of investors realizing that the bear market is not over. Enthusiasm for the recent rally should evaporate quickly.

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This chart below shows a day-by-day comparison with today’s S&P 500 and the “rising wedge” pattern that ended the bear-market rally in February 2001. To follow along, look at this chart, and then this chart.

The chart above shows the S&P 500’s closing price for 12 days. The blue line is 12 days from 2001, and the red line is 9 days from this year with room for 3 more next week. The 7th day is where the bear-market rallies crack. That was February 2, 2001 and May 7, 2008.

Today’s 9 point drop was a bit worse than the 2 point drop on the 9th day in 2001. So, we are collapsing a bit ahead of schedule. The last few believers in the rally are being wrung out here. If we continue in the same pattern of February 2001, traders will realize that the bear market is not yet over early next week, and a major sell-off will ensue.

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The current “rising wedge” pattern on the S&P 500 chart is paralleling the one from seven years ago very closely. Take a look at how that pattern from the last bear market collapsed:

The big down day came on February 2, 2001 when the S&P dropped 24 points. Yesterday, the S&P dropped 25 points.

On February 3, 2001 the S&P bounced back 5 points. Today, the S&P bounced back 5 points.

What comes next if we continue to parallel this classic bearish reversal pattern? Another 100 points down over the next three weeks.

Will that happen? During the last bear market, we were unwinding a much larger bubble, so maybe not. But this time, we have a genuine financial-crisis/real-estate-disaster which could turn out to be just as bad, so maybe history will repeat.

In any case, this is a very, very scary place to be long. And as you might have guessed, I am way short this thing.

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A few days ago, I posted about how I thought the S&P 500 was in a bear-market rally featuring a “rising wedge” pattern similar to the one that occurred during the last bear market seven years ago.

This morning, I saw my analysis parroted on a major financial website. So, the meme is spreading fast, and traders are beginning to doubt this rally.

The S&P 500 is also struggling to regain and hold the 1400 level. The longer this struggle continues, the bolder the shorts will become.

I was hoping for the market to spike up once more so that I could add to my short positions, but I don’t think it is going to happen.

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This morning, The Wall Street Journal quoted Eduardo Castro-Wright, Wal-Mart Stores U.S. president:

“The economy continues to get tougher and the ‘paycheck cycle’ is more pronounced for customers than in past months. As money gets tighter for them toward the end of the month, sales drop more than we have seen in the past.”

This conjures up an image of half-starving consumers clutching their paychecks, rolling into the Wal-Mart parking lot on fumes, and then devouring a bag of uncooked rice in order to get up enough energy to walk to the gas station and spend the remainder of their paychecks on a can of gas.

But I may be exaggerating…

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