13-Week Rally Proves Unlucky

If we count last week as a turning point, then the 13-week stock market rally seemed to have finally come to an end yesterday with a two to four per cent fall in all the major indices around the globe. It should be mainly downhill from here, but how low will stocks go?

The managing director of the IMF, Dominique Strauss-Kahn yesterday reminded bullish spirits of the reality of the global economy, saying that ‘the large part of the worst is not yet behind us.’ He noted that 2009 would be the first year of negative global growth since the 1930s, and hoped ‘2010 may be be better.’

Correction time

From a stock market perspective you do not need a PhD to interpret this: stock markets have gotten well ahead of any supposed recovery in the economy and are due for a substantial correction.

That means calls for the G8 countries to begin winding up their stimulus plans are also very premature. Nobel prize winning economist Paul Krugman has been rightly warning leaders not to pull the carpet out from under the global economy too soon.

To change the analogy what we have is a patient in intensive care signing up for a marathon before the doctor has even transfered them to a normal ward. The global economy has to learn to walk again before it can run.

Indeed, standby for another painful unwinding of global financial markets as those financial institutions, companies and individuals briefly resuscitated by the huge global bailouts from governments once again have to face headwinds that they may not have the capacity to survive.

Sell, sell, sell

In this atmosphere the only logical thing for stock market investors to do is to sell, and that is what they have started to do, boosting the dollar and bonds in the process. The overblown commodities market has also taken a hit with gold holding up best.

So this could be an ugly summer for equities which have rallied far too high and far too quickly for the worst recession since the Great Depression. Closing positions and waiting for another opportunity to buy quality stocks at lower levels looks obvious.

Comments

[Dean M:]

Great observation on the unlucky 13. I think there might be a couple gasps of life left in the rally but this will probably be where it started to roll over.

Jun 16 07:51 AM

[sunnsea:]

The banks made up some losses with their Fed and TARP pumps and now are ready to cash in on stocks and shift more to oil with $100 a barrel more likely each day. They want to return the TARP money now so they can pay bonuses, come back later in the year after the next leg down in September and get another pump of cash and do it all over again. This is is getting to be a bit boring.

Jun 16 09:39 AM

[Mad Hedge F...:]

Well said. It looks like the worm has finally turned. Hedge funds that rushed headlong into piling on new risk positions as recently as last Friday are now unwinding them today just as fast. All last week the smart money was selling to the late comers, newbies, and wanabees. The Viagra is starting to wear off. It’s time to take short term trading profits on crude (USO), commodities (DJP), all stocks (SPX), emerging markets (EEM), short Treasury bonds (TBT), all currencies (FXE), and junk bonds (JNK, HYG). I love all these things long term, but suffer from a short term tolerance for paid. When the best case scenario is sideways, I’m outa there. Look for decent bounces in risk reducing positions like the dollar ($USD), short dated Treasury securities (CSJ), and defensive sectors like utilities (IDU). It has been obvious to me that all of the good, long term holds were rolling over on shrinking volumes right at 50 or 200 day moving averages, since last month (see “Sell in May and Go Away” at www.madhedgefundtrader...).

Jun 16 02:32 PM

[djk!:]

Peter says,
"Closing positions and waiting for another opportunity to buy quality stocks at lower levels looks obvious."
But this is exactly what you were saying on April 13th and anyone who believed you then lost out on nine additional weeks of rally. on 4/13 S&P was ~869, in the meantime reaching ~950, and the DOW was ~8057 on 4/13, in the meantime as high as ~8800. so a full 2 months after the first warning call, and only 1/3 of the way into the rally you called a top, now 2 months later after a continued rally you call a top again. Like they say, if you repeat the mantra eventually you might get it right but only after being wrong for so long. Be interesting to know how many of your readers thought you knew what you were talking about on 4/13 and sold, being only 1/3rd of the way into your "suckers rally", like someone said back on 4/13, the real suckers are the ones who stayed on the sidelines.

Jun 19 07:52 AM