Dead cat bounce?

Due to my increasing anxiety with every rally in equities, I gathered some charts of the S & P 500 Index. It recorded a low of 666 in early March 2009, down from the October 2007 high of 1565. This represents a decline of 57.5% from the peak. What came next has been this powerful 50% retracement to approximately the 1000 level. A Fibonacci 61.8% retracement yields a value of 1078 as an intermediate peak for the SP 500. I would be a net seller if and when we approach that level.

For comparison's sake, between the 1929 peak of the Dow Jones Industrials Average to the low in 1932 (see first chart above), the market had a handful of double-digit gains. But in that duration, the market declined by 90%! In other words, for every 1 step up, the market took 3 steps down.

From the 1932 low to the 1937 peak, the DJIA had 3 triple-digit gains, including one for almost 300%--almost a quadruple. But none of these powerful rallies prevented the Great Depression. And investors holding since 1929 weren't whole again until 1953.

The harder a market falls, the higher the market rebounds, but the more difficult it is to get back to even--despite multiple powerful rallies. With the 2007-2009 decline "only" measuring 57.5%, this retracement rally should not have been surprising.

To the trained eye of an electronics engineer, the SP 500 chart between 2007 and 2009 looks like a waveform transitioning between logic "1" to logic "0" (see second chart above). However, instead of being an ideal waveform with uniform horizontal and vertical lines, the signal is distorted with undershoot and high-frequency ringing.

In layman's terms, this market is a dead cat bounce. And gravity will eventually cause it to fall back down before finding a steady-state equilibrium. The hope is that the SP 500 secular low of 666 will not be revisited, and that the index will find a trading range of consolidation above that low until a recovery is well-established.

I still posit this is a bear market rally--and not the beginning of a secular bull market. The world economy is still undergoing a delevering process as corporations, individuals and governments are still awash in debt. Banks haven't honestly accounted for toxic assets on their balance sheets. With unemployment climbing, tight credit conditions, and the American consumer tapped out, any economic recovery will remain muted. Equities may still rise from here, but at some point (soon), the market will become over-extended.