Monday, April 27, 2009


One of the most frustrating aspects of a secular bear market is the number of bear market rallies seemingly designed to pull in investors then swat them down just when hope begins to renew. The graph below shows the seven bear market rallies following 1929 and the accompanying seven failures to sustain them. From 1929 until 1933 there were ample opportunities to hope and croak.

Since the market high in October 2007 the S&P has paused three times for a bounce before resuming its downward path. In early spring of 2008 the S&P gained nearly 15% before collapsing again. The year end rally of last year saw a relief gain of over 27% and now again, the springtime sprigs have put on over 30% since the March low. None of the rebounds have been able to regain the level of the previous one. The pattern of lower highs and lower lows remains intact despite the green shoots of recovery the Washington policy makers wax poetic about.

Make no mistake, I know the siren call of a rally. No manager wants to miss a 30% move and I find myself taking very small scout positions just in case. The covered call strategy begins to look ugly when a minor time premium is exchanged for strike price that goes deeper into the money.

I once had an old jewish attorney whisper to me as I headed up to the witness stand in court, "sitzfleisch." What he was saying was, sit, shut up and be patient.

John Barnyak