Wednesday, May 26, 2010

Beware of Short Term Rallies

Stocks rebounded but one still need to be mindful about the situation in North Korea, which relationships between two Koreas seemingly to be deteriorating with latest North Korea expelling eight South Korean government workers and threatening to close its borders to its neighbor to the south completely. Also, persistent concerns about the debt situation in Europe and the potential of it to evolve into a global problem have already wiped out about 6 trillion USD of value in global equities.

On top of that money supply had stopped increasing. Liquidity is drying up and a few short weeks ago, mutual fund cash levels reached a record low of 3.4% , according to Jason Geopfert, president of SentimentTrader.com. The old record of 3.5% was set in the summer of 2007 at the very end of a cyclical bull market off the 2003 lows. Back then, it took fund managers 41/2 years to get fully invested.

The chart pattern is clear to me. Valuation is still very high and monetary indicators are clearly negative for stocks. Longer-term sentiment indicators have not changed for the better – patterns that look like potential topping formations. If prices break below the lower boundary, the huge rally off the March 2009 low is over and the bear market is back.

Right now, the arguments for an eventual rather than an immediate.

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