Rally Nearing Exhaustion, Bear Market Likely to Resume
Since the Federal Reserve rescued Bear Stearns and buoyed the banking system with some rather unusual tactics in late March, the stock market has been on a roll. Absent the Fed’s extraordinary measures, the equity markets would have collapsed. Instead the markets have staged what I would term a “bear market rally” or a “sucker’s rally.” It’s puzzling how investor psychology swung from extreme fear to blind optimism in matter of moments following the Fed’s announcement. Wall Street’s pundits are now issuing a message that the capital markets are pricing in an economic recovery in the near future, but hard economic evidence suggests the contrary. To me, it sounds like the siren’s song luring unwary investors to their peril. I urge you to resist getting whisked away by the Wall Street’s eternally positive spin. This economic “slowdown” may be deeper and more protracted than “experts” and “officials” want to publicly acknowledge.
The undercurrents of the credit and financial markets warrant caution. Strong rallies and crushing sell-offs are signature characteristics of a bear market. There are many indications that this run up is near an end. You can surmise what might follow. I will wait for more confirmation before becoming a little more opportunistic with portfolios – of course with a bent toward capital preservation and an absolute return.
