Mar. 23, 2009 (Investor's Business Daily) -- News of the Treasury Department's plan to clear bad assets off the books, along with a rise in home sales, jolted the market to its highest level in five weeks.
SPDR KBW Bank (KBE), Regional Bank HOLDRs (RKH), Financial Select Sector SPDR (XLF), iShares Dow Jones US Financial Sector (IYF) and other financial ETFs led the S&P 500's massive 7% surge after a two-day pause. The ETFs each rallied 14% to an eye-popping 19%.
Although volume rose more than average, it was lower than in the rally's first week, which started March 9. All three ETFs cleared their 10-week moving averages but face resistance at their February peaks.
The major real estate ETFs -- Vanguard REIT Index (VNQ), SPDR DJ Wilshire REIT (RWR), iShares Cohen & Steers Realty Majors (ICF), iShares Dow Jones US Real Estate (IYR )and iShares Dow Jones US Home Construction (ITB) -- rocketed 12% to 15% each. Volume fell below average for the REITs but increased for the homebuilders.
Emerging-market ETFs Market Vectors Russia (RSX), iShares FTSE/Xinhua China 25 (FXI) and SPDR S&P Emerging Europe (GUR) led overseas markets. They gapped up 10% to 12%.
"The fact that it's news-driven makes today questionable," said Greg Capra, co-founder and CEO of Pristine Capital Holdings. "The internals within the market and sentiment are telling us this market should rest here or pull back."
Purchases of call options, or contracts that benefit from rising prices, have reached extreme levels, Capra says. When that contrarian indicator gets so high, the market historically tends to retreat.
"At extreme points, the crowd jumps in at the worst time," Capra said.
An American Association of Individual Investors survey found that the percentage of bearish investors surged to 70% -- a new high -- at the market's bottom on March 6, Capra adds. The portion of bullish investors fell to a historically low 19%.
Sentiment Settling Down
The survey currently shows 38.2% of investors are bearish and 45% are bullish. This suggests that the extreme sentiment has died down.
Monday's surge was not only driven by news but also "a bit of 'performance anxiety' setting in from the underinvested," said Anthony Welch, partner at Sarasota Capital Strategies. "There is a record amount of cash on the sidelines, which can fuel big rallies."
Welch added: "Investors should realize that there has been significant damage done to financials, which will take time to heal. While Bank of America (BAC) is up over 80% for this month, it's still down over 47% for 2009."
Welch advises investors to focus on sectors that have been strong all year. His firm has been invested in iShares MSCI Emerging Markets (EEM). It gapped up 8% on Monday and cleared previous resistance around 25. The ETF has gained 4% year to date vs. -12% for iShares MSCI EAFE ( EFA), the developed-markets benchmark.
Sarasota also owns Market Vectors Agribusiness (MOO), which spiked 5.75% to 29.50 on Monday. The ETF bounced off its 10-week line but has repeatedly hit resistance at 31. It has gained 6.5% year to date.
The S&P 500's surge above the 805 area Monday suggests the bear market bottomed March 6, says Janice Dorn, founder of thetradingdoctor.com. The S&P closed at 823.
Based on a form of technical analysis known as fractal studies, Dorn expects an intermediate peak on April 2, at which point 20he market would pull back before resuming its rally.
Fractal analysis aims to find order in a chaotic environment like the markets, Dorn says. She uses fractals to try to predict investment performance based on mathematical analysis of recent zigs and zags.
The next leg up will likely run into July, Dorn says. She expects the S&P 500 to reach 1050 to 1100, up 28% to 34% from Monday's close.
"A large number of traders who are in post-traumatic stress and 'financial anxiety disorder' will not believe this rally," said Dorn. "They will wait until it 'looks so great that it will never go down again' and they will be getting in near the top."
Returning Risk Appetite
Fractal analysis is less reliable on a short-term basis but is 80% correct over periods of six months or more, according to Dorn.
The strong rally in Chinese stocks and the CurrencyShares Australian Dollar Trust (FXA), a commodities-based currency ETF, signals that risk appetite is returning to hard assets, which could lead the next rally, Dorn says.
