This Is Still Just a Rally

The strength of this bear market rally is considerable and last night the psychologically significant 1,000 barrier was broken on the S&P, and bonds and the dollar weakened.

But while I concede that the bulls have been proven right about the duration and strength of the stock market rally, it is still just a rally and not a new bull market.

Trade depression

How can we have a new bull market with global trade in a deeper depression than the 1930s? India just posted export figures down for a ninth month in a row, 28 percent lower than a year ago. Globally the World Trade Organization forecasts a greater than 10 percent fall in world trade this year, an astonishingly bad year for business.

Now try to translate that into a rapid improvement in profits for global companies. It is just not going to happen. Quite the contrary, there will be a contraction as sharp revenue falls have a leveraged impact on profits, which will turn to losses in many cases.

Analysts are supposed to forecast these changes but in practice they are seldom impartial and have to look after their own business interests, particularly in the current climate. Profit or loss estimates will therefore be too optimistic and hence share prices are not currently showing the true impact of the recession/depression on valuations.

Try telling that to a newly converted born-again stock market bull. They will find some technical argument to support their ‘gut feeling’ that things are bottoming out and that a recovery is around the corner.

Last week I heard Dr Marc Faber give a lecture entitled ‘Yes there is light at the end of the tunnel’, and his opening remark was: ‘OK but how long is the tunnel?’ When I caught him in the bar later I asked him if he could be sure that the light in the tunnel is not an oncoming train!

Correction coming

He thought it a fair point and reckons the true bottom for shares is still a couple of years away and that a correction from the current rally is coming up, although he was not sure when.

Given that 1,050 points on the S&P would mark an exact 50 percent retracement from the lows of March that would seem the Fibonacci sequence level most likely to see a reversal of the bull trend.

For the Dow Jones to pass the magic 10,000 barrier there is another seven percent to climb compared with five percent on the S&P. Somewhere between these two levels might be a very good point at which to cash out and go short.