Bull Market Delusions in Recovery


". . .terrific rallies are not uncommon following terrific sell-offs!"

The last major stock market ‘recovery’ in the U.S. started after the October 9, 2002 ‘bottom’ and lasted 5-years and 2-days. Total gain: 103%. Unfortunately, by November 21, 2008 all of these ‘gains’ had been lost, thus rendering the 2002 ‘bottom’ open to interpretation.

The latest major market ‘recovery’ started after the S&P hit an intraday low of 666.79 on March 8, 2009. Total gain using last weeks close: 50.5%. Given the sheer momentum behind this rally it is not unthinkable that the S&P 500 could rally by an additional 50.5% if the ‘recovery’ theme continues (but even if it did, the S&P 500 would still be down 4% from the ‘top’ registered on October 11, 2007).

With the current market rally—which is just over 5-months old—overly optimistic analysts seem to be missing the major point: terrific rallies are not uncommon following terrific sell-offs! What would be uncommon is if many investors actually timed the March ‘bottom’ perfectly.

There are always isolated bargains to be found in equities, but ‘the markets’ themselves are anything but a bargain today. Instead stocks are pricing in a powerful economic/earnings recovery that is expected to materialize just as the U.S. consumer goes under. Can monetary and fiscal stimulus measures alone really do for the economy/markets what the housing/credit bubbles did during the 2002-2007 ‘recovery’?

There is also the risk, as the Fed eyes removing some of its emergency easing strategies and/or interest rates begin to rise, that an economic relapse will occur. Can economic stability in the U.S. really be sustained if interest rates jump sharply higher? Finally, policymakers might be unable to sustain their attack against the deflationary monsters threatening to devour markets and asset prices globally. Thanks to QE measures and China’s seemingly robust [bubble?] recovery, the deflation argument has recently lost some its backers. This could quickly change...

In short, it is the height of idiocy to take a 5-month snapshot of market activity and contend that big new bull market is born. Given the potentially transient and/or unsustainable forces uniting to stabilize the U.S. economy, common sense leads to one conclusion: today’s rally is a cyclical bull inside of a secular bear. To ignore this fact is to risk financial destruction.

Related Articles

Get Our Streetwise Reports Newsletter Free

A valid email address is required to subscribe