Yes, the Dow has perked up, relatively speaking. But what does it mean? Is it a sign of recovery or a sucker’s rally? The Financial Times plots the history of other such rallies and openly speculates:
The market is a cruel mistress indeed. Compounding the pain of big swoons, it kicks investors when they are down by luring them into sucker’s rallies – typically sharp but fleeting bounces in the middle of a bear market.
The current recovery has propelled the S&P 500 a third above its March low in just 60 days, convincing many sceptics that a new bull market has begun. Noted bear Doug Kass of Seabreeze Partners said the recent nadir may be a “generational low” and strategist Tobias Levkovich of Citigroup claimed many large investors who had feared another bear market rally may soon capitulate, pushing markets higher.
The Bull Market Express may really be pulling out of the station, but Wall Street’s trains have a nasty tendency to derail just as passengers jostle for seats. Most recently, the S&P 500 soared 24 per cent over seven weeks ending in early January, only to plunge to a new low. It was a fairly typical sucker’s rally and bear markets often need more than one to create sufficient disillusionment for a definitive bottom.
Color me skeptical about the current rally. The purported good news is less encouraging than meets the eye: the banks’ stress test ended up being a negotiation with the Fed on a final deficit number, showing that the entire process is suspect, given the change to the mark-to-market rule. The lower than expected unemployment number was preliminary – every such number since last year has been revised upward.
But the bad news is rather ominous indeed: oil prices are rising steadily again. More industrial capacity is being idled – check out this news item on the closure of the Fairfield, Alabama, steel mill. Congress just put out a $3.4 trillion budget with Hope ‘n Change planning to double the national debt in just three years. Really ominous was the Treasury auction this week that failed to attract buyers except at higher interest rates.
Then there’s the matter of all the liquidity sloshing about. Just how does the Fed remove the excess without further depressing the housing market or shoving us back into a deeper recession? And if they don’t, inflation is inevitable, particularly when we see commodity prices begin to rise again with China’s continuing purchases.
If you’re really in a pessimistic mood, check the predictions of Merrill Rosenberg and Harry Dent.
