2009=1982?

Charts: There have been four other rallies in the past that resemble the current one from a technical perspective.
1) After the monster 1929 crash there was a rally that gained 47% over 5 months. It peaked in April 1930 and the market crashed again for two more years. The chart for the Nov. 1929 to April 1930 rally looks nearly identical to today’s rally (scary).
2) In 1932 there was another bear market rally, which was the strongest rally in the history of the stock market. In 10 weeks the market gained 111%, but it morphed back into a bear market that raged for years and tore investors to shreds. This rally highlights the tendency for bear market bounces to be explosive.
3) In 1975 there was a year long rally that gained 54%, inside that lengthy rally there was a 5 month period with a 47% gain that looks like today’s rally. The 70s bear market lingered until 1982, so the 1975 rally was another trap for investors but not as bad as the 30s as the market bobbed up and down aimlessly for years.
4) The 15-year bear market that started in the late 60s finally ended with a powerful V-shaped rally in 1982 that was not a trap. The market went on to log steady gains until 1999 when, as we all know, another secular bear market developed that may or may not be ending right now.
In summary, there has only been one explosive V-shaped rally at the end of a severe downswing that then turned into a secular bull market and there have been three explosive and long-lasting rallies that turned out to be bear traps. Of the four rallies mentioned above overall economic conditions today are most similar to 1975. In 1975 the country was coming out of a recession that was caused by an oil shock. Industries were restocking after slashing to the bone but long standing structural problems remained that the government was not addressing which caused the rally to fail after one year. The structural problem in the 70s was inflation; today it is the ballooning government deficit. Other than that the two eras are much the same. What’s really different in the 70s was that the Soviet Union was taking the wood to America. Today we are taking the wood to the bad guys but it is not clear that we are at a clear geopolitical turning point as was the case in 1982 where US victory in the Cold War became readily apparent to investors. To shed clarity on the state of today’s Long War let’s skip fundamentals and dive straight into geopolitics.

Geopolitics: Mehsud is dead. While absolute proof is not forthcoming events on the ground make it a near certainty. There have been two shoot-outs among rival Taliban chiefs over who gets to be the new leader, resulting in a bunch of dead bad guys (bullish). The Pakistani Taliban has always been a loose collection of independent-minded tribes/militias held together only by the personality and genius of Mehsud. Now that he is gone the remaining tribal chieftains are at each others’ throats. They probably won’t be able to pick a leader from within their own ranks but these chieftains all have one thing in common: every one of them harbors tremendous respect for the Al Qaeda leaders that they are hiding in North Waziristan. Al Qaeda provides millions of dollars of funding to the Pakistani Taliban and some leadership. Mehsud’s death will probably result in Al Qaeda essentially taking over the Taliban, which of course would be bearish. The CIA and the Paki Army need to move fast before this happens and put the hurt on the bad guys while they are disorganized. Our key barometers will be drone activity and bad guy deaths by the Paki Army.
The real good news over the drone strike that killed Mehsud is not that one super bad guy is dead. No, it is that the average Pakistani voter may be more favorably predisposed toward CIA drone strikes within their country. If it weren’t for the vast reservoir of hatred that most moderate Pakistani civilians have against drones, the CIA would fly ten times more missions. Mehsud’s death may shift public opinion and allow for more flights (bullish).
Eritrea is playing a dangerous game. Bad guys from Afghanistan and Pakistan are finding their way to the tiny Red Sea country that is close to Somalia. Eritrean training camps and supply lines feed these fighters into the ongoing Somali civil war, where the bad guys join Al-Shabab, an Al-Qaeda franchisee labeled as super-bad guys by DMU. Secretary of State Hillary Clinton issued this warning, “It is long past due for Eritrea to cease and desist its support for Al-Shabab. We are making it very clear that their actions are unacceptable. We intend to take action if they do not cease.” Mrs. Clinton is practically declaring war against Eritrea. The situation in the horn of Africa is growing hotter as Al Shabab wears down Somalia’s US supported government. Recent Islamic flare-ups in Algeria and Nigeria complete the picture—sub-Saharan Africa is becoming the next big battleground in the Long War.