Is the market rally for real?

Stocks bounced nicely last week, with the S&P 500 enjoying its longest rally of 2015. Is the advance for real, or another dead-cat bounce in an ongoing correction? Well, the downtrend remains intact – the S&P still trades well below its downward-sloping 200-day moving average. Traders were waiting for indices to retest their August lows; once that occurred, a short-term bounce was on the cards. Bears see this as a mere technical rebound, a junk rally with the biggest gains accruing to 2015’s worst performers.

StockTake has been cautious regarding recent market bounces, warning that rapid gains are associated with volatile markets. However, the recent bounce appears significant. The most troubled sectors – emerging markets, energy, materials – have outpaced the S&P 500. Indices everywhere have risen. More than half of S&P 500 stocks now trade above their 50-day average; when markets bounced in early September, this figure never exceeded 30 per cent. Crucially, the Vix, or fear index, has plunged, last week remaining below 20 – its historical average – for the first time since the market storm erupted in August.

The sentiment about-turn can be traced to the recent weak jobs number in the US, indicating a weaker global economy is now baked into prices, with investors cheering the prospect of continued monetary easing. The “bad news is good news” thesis may frustrate bears, but market action suggests the worst of the storm has passed.

Doubting Digicel

The pickup in sentiment came too late for Denis O’Brien’s Digicel, which last week blamed market volatility for its decision to abandon its planned US flotation.

The recent initial public offering (IPO) market has been difficult; the previous week, five market debutantes cut their offer price to attract investors. Still, the number of IPO withdrawals is only slightly above 2013 and 2014 levels. Investor appetite has not disappeared; last week, money-losing tech firm Pure Storage made a successful market debut.

Digicel suffers from a number of company-specific issues, as its prospectus makes clear. Its mobile subscriber base has grown by 32 per cent annually since 2002, but those days of heady growth are over – it is the biggest mobile player in 21 of the 31 countries it operates in, with a market share of at least 50 per cent in 20 of those countries.

Revenues have been flat for three years. It lost $157.6 million last year, with the firm’s $6.5 billion debt pile obliging it to cough up $600 million in annual financing costs. It operates mainly in countries it admits are “politically and economically unstable”. No profits, no growth, a hefty valuation – Digicel is not an easy sell, irrespective of the market climate.

Oil in bull market territory

Oil is in official bull market territory, having gained 30 per cent since bottoming in late August.

Prices have been boosted by a sharp drop in US shale oil production as well as Russia’s announcement it is in talks with Saudi Arabia regarding low oil prices.

Still, prices are less than half levels seen at 2014's high, so does the rally have further room to run? Perhaps. Bespoke Investment Group notes there have been 34 oil bull markets since 1983, with prices gaining 39 per cent during the median rally and 65 per cent in the average rally. The median and average bull have lasted 149 and 220 days respectively.

However, bulls shouldn’t get too excited. Eleven bull markets lasted 50 days or less; the shortest lasted just four days, while five lasted less than 10 days. It’s a bear market one moment, a bull market the next – trading oil has always been a volatile game, and one best left to those with strong stomachs.

Dr Doom sees 1987-style crash Markets could suffer a 1987-style crash, Marc "Dr Doom" Faber told Bloomberg last week. Faber famously advised investors to sell prior to 1987's infamous Black Monday crash, but don't stock up on the tinned food just yet. In 2014, Faber warned a crash "even worse" than 1987 was coming. A 2013 CNBC headline reads: "Marc Faber: Look out! A 1987-style crash is coming". In 2012, he told Bloomberg a crash, "like in 1987", was possible.

Eventually, markets will suffer a big 1987-like decline. It could be next year, it might be 2020, who knows. One thing is certain though – Marc Faber will have seen it coming.