5 Reasons Why I Don't Think This Rally Will Last

By Jim Wiandt

Here are five reasons I don't believe this rally has legs ... and why I find XLF's 10% run on Monday rather incredible.

Well, Matt—if your research holds any water, Monday must have been a BOOM day for the (RAFI) fundamentalists out there.

And this huge rally for XLF? I don't believe it for a second. In fact, the same dangerous impulses that led me to buy XLF at $15.07 (and see it promptly drop to below $6) are urging me to sell now that we're almost touching $12. After all, in that October binge of ETF buying (heavy on XLF and FXI—that would be the SPDRs Financials and the FTSE/Xinhua iShares for the less-ETF-focused among you), I'm actually AHEAD right now ... after a disastrous start.

In this environment, I'm looking forward to talking to Rob Arnott this Thursday at 1:00 p.m., where he'll be doing a webinar discussing bonds' recent 40-year outperformance of equities (register for free here) as well as current market conditions. Rob is working hard as always and has done some great recent research. He's one of the people in the mix in our world who I always listen to when he has something to say.

OK, so let's get to it. For what it's worth (and I've already shown I can be as humbled as anyone by market swings), here are five reasons I don't believe this rally will last:

1. We are up (SPY is up) 35% since the bottom. Thirty-Five Percent. The markets are supposed to lead the economy by six months. I just don't believe our prospects have magically come up 35% off the bottom of this economic cycle.
2. There is still no concrete evidence that the administration really knows what they're doing. The TED spread has really come in—to less than 100 basis points. But we're still well higher than where we'd been a couple years ago and stretching into the past. We all want to believe in the stimulus plan. But I suspect it gets tougher before it gets easier. Be prepared for that.
3. I mentioned SPY being up 35% from the bottom. For XLF, that number is 100%. XLF has flat DOUBLED from the bottom. Indeed, the Deutsche Bank team today recommended that investors buy its short STOXX 600 Financials db x-trackers as its "idea of the day."
4. Everybody and their mom are buying right now on the retail side, but there's not much institutional conviction (see the MarketWatch article I mention below). Consensus there says bear market rally. My money is with the big boys.
5. Don Friedman says, "looking for an opportunity to short as we near 9,000" ... and I ALWAYS use Don as my contrarian indicator. So maybe we should stay long after all. In the same breath, though, Don adds: "Hoping that USO has started a bull move as it busted through $30 today." Sounds like Don might be running some very sophisticated market neutral-strategies down there in Atlanta.

Basically, nearly everyone is saying "bear market rally" and that the "Smart money starts to bail on stocks' rally."

In short, this market is again telling us why it's so irresistible to watch, and while we're tempted into the same dumb mistakes again and again.

A MONTH ago the same MarketWatch ran this "Holy Hindenburg" story on the market's imminent plunge. So don't hold your breath on calling the top or the bottom.

But DO get your ducks in a row. Because if you can't take the market losing back 30% or 40% ... or even 50% ... from here (which it absolutely could), then you should not be in it. Go buy some of grandma's CDs.

Better, yet, as I've been saying for months ... get a plan and stick to it. The odds are, you're in the vicinity of what is very likely going to be a historic buying opportunity for equities.

I'll take my chances with a well-considered asset allocation plan.

Original post

Comments

[Alan Skoreyko:]

Seems like with all the hype we must be due for a pull back. Sell when they are buying and buy when they are sellin.

May 05 05:58 AM

[Archman Inv...:]

At DOW 14,000 the pros say:
"Keep on buying"
"Buy for the long term"
"Buy and hold"
"Everything is great"
"Goldilocks economy"
"Never been stronger"

At DOW 6500 the pros say:
"Buy and hold is dead"
"Give your money to the pros and let them trade the market for that is the only way to make money now"
"Time to take money off the table"
"It is the end of the world"
"Cut your stock exposure by 50%"

However, at DOW 6500, the pros, the institutions, the hedge funds are buying hand over fist while mom and pop are shell shocked and on the side lines.

Now, 35% to the upside later, mom and pop are getting back in, the pros are putting their "super strong buys" on everything, and apparently, everything is right with the world again.

Now wonder the average American's portfolio, as of today, is back where it was in 1999.

Goldman ups the coal sector to super strong buy AFTER it has a 200% move up.

Yeah. Ok.

Wall street tells you what you want to hear, I tell you what you need to hear.

May 05 07:16 AM

[Archman Inv...:]

<<Everybody and their mom are buying right now on the retail side, but there's not much institutional conviction (see the MarketWatch article I mention below). Consensus there says bear market rally. My money is with the big boys.>>

I wanted to add a comment about that statement.

I believe that statement to be wrong. Statistics show that typically after a brutal downdraft in the market, average mom and pop Americans are still to shocked to touch the market with a 20 foot pole.
There is ample reason to believe that this entire market rally has been nothing more than hedge funds (which now make up over 70% of the daily market activity), and worse, proprietary trading desks (the likes of Goldman, Morgan, BAC, C, etc, etc) using nothing more than TARP money to trade their way to looking good.

To me, that scenario is much more realistic than average americans moving the market, when we all know that average americans are not "traders" by any stretch, and have little or no net worth or excess cash to actually make a difference in market movements.

As per my post above, now that "Wall Street" is starting their "super strong buy" mode on stocks now, (after a 35% move up) I would say the market is following its predictable pattern of starting to sucker in average americans while the smart money unloads to them.

May 05 07:31 AM

[sheople:]

The feds/government are good at controlling what you see and hear. They are selling swampland as a good buy. We have a controlled economy, including markets. They burn my fingers when I even think about touching them.

May 05 08:05 AM

[Common Cents:]

I'm not sure that up xlf up 35 % means anything by itself. You could also say it is still 70% off its highs. If 35 % up is a sell signal, why isn't 70% off the high a buy sign?

I'm not saying I think it is time to buy xlf, just that using percentage changes seems like very shallow analysis.

May 05 08:22 AM

[Mutual Fund...:]

"Mom and Pop investors" this post is for you. For simplified prudent and easy to understand investment suggestions that will enable you to receive significant returns on your investents in good times and bail out information when markets are going to fall significantly go to web page: www.mutualfundwealth.com/
Each week I provide updates of best performing mutual fund equities in sectors of the market place that you should consider as they are moving forward.

Writers of articles relying on financial analysts, double bottom charting scenarios and the Big Boys, really don't do well with their forcasts. If they did, wouldn't you have been informed and warned prior to last years financial crisis? Of course you would have, but they didn't have a clue.

May 05 09:33 AM

[SivBum:]

I heard & read from pundits that retail investors are bidding up the recent rally. However, in my circle, there is little evidence of any individuals rushing back in. In fact, a few are selling into recent strengths and adding to their cash holding. Anyone have statistics showing institutions vs retail money flows?

May 05 01:13 PM