It takes time and low expectations to kickstart a rally

Yesterday the market bounced back. One should not read too much in to it at this stage. If the market had bounced back after few more days of selling, it would have been a different scenario.

What kicks offs a enduring long duration rally of months in market is mismatch between expectations. If you go back and look at July and see what was the situation, you get a better picture. The expectation was for continuous slide down. The expectations for slowdown in economy were very high. The expectation of sharp slowdown in earnings were very high. The sentiment surveys were at very low end.

As against that the earnings projections were improving and not deteriorating. Contrary to most people belief the future earnings predictions are very good indicator of disconnects. So in a scenario of low expectations the rally in July started with the start of earning season when market participants realised that their earning expectations were very low and as the season approached there were enough indicators to point to double digit growth.

As those who trade earnings know very well the earning trade works because there is expectation mismatch. You get best returns on earnings day breakout if the earning is a surprise for market participants. So if you see the July/August earning season, there were surprises after surprises.

In an ideal scenario a few months of down move or sideways move will set up the market again at a ideal expectation level and then if the earnings surprise, you will again have a enduring multi month rally. You can think in technical terms and you can think in earnings expectations term. You will get better results when you combine the two.