Bear Will Return

It is a trap. Even after the 1929 Crash, we had rally just like this one – up 30% the first time, 48% the second time, and more. Each time, this is a great selling opportunities and sure enough, after each temporary bounce, the market plunged far further.
Right now, unemployment is getting worse far more rapidly than at the end of a recession. Bankruptcies are still soaring. Credit is still scarce. The IMF, World Bank, and the OECD are predicting even sharper plunge.

Still, we could see stocks rally through the end of this month or even longer. But the bear is out there, my friend. The US government has allocated at least $356bn bailing out the banks alone. Most of that has been thrown down a rat hole. And it is getting worse and the IMF announced that toxic debts could reach $4 trillion, up from an estimate of $2.2 trillion that it made in January.

Note that the deleveraging of the US credit bubble has already begun and it is not pretty. Consumer wealth is evaporating like water in the desert. Credit cards are imploding and nervous bankers would eliminate at least $2 trillion of available credit on credit cards by end of this year. The effect of those cutbacks on already anxious consumers is bound to be enormous.

When Japan slid into its economic ‘lost decade’, the rest of the world kept chugging along, which was the factor in pulling Japan out of its rut. Today, the World Bank says global economic growth will slow this year by far more than previously estimated, thus sending the global economy into its first contraction – for the first time since World War II.

All in all, market is bearish until proven otherwise. We have seen big upward swings in this bear market only to see them crush later on. For the S&P 500, analysts are expecting earnings will decline 37% from a year ago with all 10 groups in the index to show a year-on-year contraction in profits – something that hasn’t happened in the 10 years Thomson Financial has been tracking this data.

Fundamentals are still terrible, and they have not improved enough to justify this rally. What’s more, the market is overbought, but it can get a lot more overbought and overextended as we saw in the market ‘recovery’ of 2004-2006 when the US equity indices were managed up to new highs.

This is a trading rally!. Don’t get married to positions and try to ride the market’s swings up and down.