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March 23, 2009

Turbo Rally

Stocks forged a tall candle today, surging 7% higher after the Treasury followed up Berskanke's plan last week to put the burden of Wall Street malfeasances squarely on Main Street. On the technical front, any chance of seeing a prompt return to lows was shattered. We are now clearly in the midst of the major counter-trend rally of this bear market. Being a counter-trend rally, it is corrective. We will eventually see new lows in this bear market after the correction is over.

stock index chart

Curiously, today's surge came on lower volume, indicating that a pull-back is imminent, but this rally is doing what bull markets... and major counter-trend rallies... do best: they surge higher into extreme overbought conditions thereby locking out the latecomers and squeezing shorts.

I'm going to cut this post short since I'm a bit under the weather, but first a reiteration of a point made yesterday: the length of corrective moves tend to be proportional to the move they are correcting. It makes sense for a 12-week rally, for example, to be corrected by a 4-to-6 week pull-back. However, an 18-month wave will not be corrected by only a 4-to-6 week move. I expect this move to persist through summer and perhaps through the end of the year. I suspect we'll see a 4-digit S&P 500 print before it's all over, as well, but we'll just read the tea leaves as they come.

 

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