Why I Am Suspicious

Rising prices must be accompanied with rising volume – this is an old and time-honored stock market analysis concept and probably one of the most profound insights into market behaviour. Usually, a rally with declining volume is a sign of a weak market and usually a harbinger of a correction if not an outright trend change.

The whole rally of the March 2009 of the S&P 500 is characterized by low volume and since the late October the signs are more visible. It is declining markedly and the recent break out in prices to new highs for the year is on very thin ice.

The divergence between advance-decline line and momentum indicators is just another tell-tale signs to watch out for. Sentiment indicators got frothy.

The news of the financial woes in Dubai should remind investors that the major debt problem associated with the global real estate bubble have not been solved. So over the next two years, I expect that we will hear from many more defaulting borrowers in and outside the U.S.

I also expect a new wave of mortgage resets starting to hit the US banking system in the second half of 2010. It will be interesting to see how the governments around the globe react. The weaker ones may find themselves trapped, not being able to absorb a new surge of losses.

The worst case scenario will be not only banks going bust, we may well see banks plus some governments going bust.

For now, I would treat any potential stock market weakness as a buying opportunity since I don’t yet see an end to the medium term up trend that started in March. But we should never forget the long term risks, either.