Is This a Sucker's Rally?

There is a widespread viewpoint that last year's financial crisis changed the world for the worse. Those taking this perspective see one of the greatest rallies in history as insanity -- a sucker's rally.

If you put "sucker's rally" in a Google search, you will get thousands of hits. You were told that you were a sucker in March, April, May .... well, you get the idea.

David Merkel, one of our best sources, has a thoughtful analysis of sentiment, based upon reactions to his writing. (And thanks for the references to our questions!) He has good reasons for his caution on the market, but he still posts a thoughtful analysis about sentiment. In a typically thoughtful fashion he writes as follows:

Look, I see it in myself. I tend toward the negative in this era, because I think it is under-told. Would it surprise you if you knew that I was one of the more bullish guys in my last three firms (1998-2007)? But even if under-told, there is something that always makes the bear case sound smarter. Skeptics almost always seem smarter than optimists. But, the optimists usually win, except when there is war on your home soil, famine, plague, or extreme socialism

We strongly encourage reading the entire article. He is correct in his analysis of bullish viewpoints. Trying to explain that conditions are better is a tough sell -- based upon data that many disbelieve, fighting anecdotes that we all see.

Barry Ritholtz, another featured source, has a reputation for seeing the negatives. He became more constructive on the market in March and still sees the rally in the sixth or seventh inning, mostly based upon technical analysis.

Jim Grant, bearish for as long as we can remember, now takes a bullish stance. In a thoughtful and nuanced article, Grant cites many of the factors --hard data used by the ECRI, for example --- that we have frequently cited. Once again, read it all for yourself.

An Alternative Viewpoint

Daniel Solin at Daily Finance writes If this is a sucker's rally, I'll take it :

A globally diversified portfolio of low cost index funds, conservatively invested 60 percent in stocks and 40 percent in bonds, is up 20 percent year-to-date. How's your portfolio doing?

Probably not very well if you listened to "market beating" brokers or to much of the financial media.

Some of us have done even better, mostly by spotting stocks that had the best rebound potential.

Circumstances Change

Some investors are locked into backward-looking valuation methods, using ten-year P/E ratios including an era of massive write downs. Is this what we should expect for the future? These methods will be very slow to adapt to changing conditions.

It seems wiser to adopt a method that adjusts to the facts. This is not a blind "buy and hold" strategy, but one that attends to both time frames and the opportunities of the moment. In July, for example, we noted a need for caution. As the evidence changed, our posture changed.

Investors who are not looking ahead, or who lack ideas, need help. There are many attractive stocks trading well below pre-Lehman levels. With a depression off the table, valuation prospects have changed.

Comments

[Jeff Miller:]

rrtzmd -- I am curious about how you define "credibility." Unlike most others, I post a weekly update on trading positions and market outlook. The outlook changes as we get new information. It is not always correct, but it does adjust. This is exactly the point of my article -- looking for criteria that change with the times. What do you think I should do differently?

About expanding the universe --- we have had many requests for additional ETF's in our rankings. Many do not qualify for trading because of liquidity issues and wide bid/ask spreads. For those who have taken advantage of our weekly update email, we also make available the complete rankings. We are constantly trying to improve our methods and also to provide more useful information.

We also have documented the entry and exit date of each trade, living with the bad periods along with the winners. No position that we bought "miraculously disappeared."

To summarize, your allegations are completely incorrect.

I try very hard to find something constructive in each comment -- and I always read them. I understand that no matter how much I try to be helpful, there will be some who do not find value from my work. That's fine. I don't really understand smarmy personal attacks like "snake oil."

I am not giving your comment a "thumbs down" because I do not rate comments on my own articles. I do hope that you will try to elevate both the content and tone of what you write.

Jeff


On Sep 22 09:35 AM rrtzmd wrote:

> ...you lack credibility...July 1, you say go short:
>
> seekingalpha.com/artic...
>
> ...oops!!...big mistake!...so what do you do?...you change your "universe":
>
>
> seekingalpha.com/artic...
>
>
> ...and, oh, look!!...with this new "expanded universe," your previous
> selections have miraculously disappeared!!...and, lo, but the markets'
> best performers are suddenly at the top of your list!!...hark, methinks
> I perceive the dripping of snake oil...

Sep 22 12:10 PM

[Jeff Miller:]

Archman -- The Fed has substituted for what I call normal and sensible lending. The level of liquidity (measured by money supply) is not higher than normal. The Fed balance sheet is smaller than when Obama took office. Check out the wise comments from Bob McTeer, whom I often cite.

The rally is liquidity driven only in the sense that there was no liquidity after Lehman -- not even normal commercial paper -- and now that has been restored.

You are correct in noting that we should be watching for the exit strategy. As McTeer said today on CNBC, the Fed should show some awareness of this, but not act like the time is near.

Thanks for highlighting this issue.

Jeff


On Sep 22 09:36 AM Archman Investor wrote:

> I think it is a bit late to be wondering if it is a "suckers rally".
> I think worrying about that item has long past.
>
> The real question is: Since this is a "FED. liquidity driven, looking
> for a home rally" how long and high does this rally go? If you were
> in at
> S & P 700, then all you need to worry about it locking in profits.
>
> If you have missed this rally, well my friend, then you have a lot
> more to lose should the rally stop. At this point, we need to keep
> watching the FED for signs they are truly taking the money away.
>
>
> To me, that is the best indicator of this current rally's future
> strength.

Sep 22 12:15 PM

[enigmaman:]

Whether this rally is or was justified or not is no longer relevant, cryng over split milk, water under the bridge, the market is up, caught many with there pants down, but the easy money has been made, now the markets is a bit treacherous, it makes gains but it struggles for each additional point, there is no conviction, retail investors pretty much let this rally pass them by and Wall Street will be hard pressed to find the hot button that will change the minds of main street, so its all left up to GS and their fellow compatriots, when they decide they have squeezed as much out of this market as possible they will after they have placed their bets let it seek its own level, there is a point of diminishing returns, the market is no longer climbing a wall of worry it crawling up a wall of worry, seems to be running out of steam, so be careful because anything can knock it off the wall.

Sep 22 12:52 PM

[Tony Petroski:]

I just returned from Tibet where I was studying with the Dali Lama. What is this rally you're writing of here?

Those of you who played the "sucker's rally" know that is a reference to "Caddyshack."

Those of you who know that I couldn't have been in Tibet, our far-sighted Chinese friends prevent that, missed out on being suckers.

Sep 22 02:03 PM

[Guillaume:]

By Enignaman, I guess I am 3), goign with the trend.
Question is when is to sell?

Well, everyday, tens of articles explain why the market "should" go down, "has" to go down, these are the same people who were sayign the same thing since the end of May...

I understand and sympathize with the Fundamental analysis, the "smart ideas" that the recession isnt over, that by every analysis S&P fair value is not above 1050, etc... but I do not think that it does really matter for the near future.

it is not about a rally on Fundamentals but about new money allocation for a market that had gone "as cash as it could" in Q1 2009, at destressed levels.
Buying destressed assets does not mean this asset has become great, it just means it is just less destressed than before and that solid improvements are being anticipated.

I'll still remain long for the moment, accepting to be proved wrong one day and drop 5%, but that might be happening 10% higher before...

Dont fight it, going short will cost you money.
You may find find this rally irrational but remember that the market can remain irrational longer that you can remain solvant...

Sep 22 02:54 PM

[Tom Armistead:]

Jeff, the reason I read SA is to get exposure to well-reasoned opinions on macro issues and market level. I appreciate your approach which is resolutely factual.

As this situation has developed new information comes out every day and visibilty is improving. Jim Grant's change of stance is an important indication, he has a very good track record of looking at the facts and arriving a reliable conclusions.

The bear market seems to have given some people the idea that extremely negative views on the economy and the market were somehow hip or stylish, but a bad attitude will only take you so far in investing.

Sep 22 03:40 PM

[enigmaman:]

This rally is about fundamentals, not business but rather fiscal fundamentals, cheap money, dollar decline, over sold. This market will not correct for rational reasons, it will correct for psychological reasons and it wont be from internal forces but rather external surprise events that will blindside investors, that will cause the panic and without retail investors to feed off of it will be the big boys who feed on each other. Retail investors are MIA, insiders are going AWOL, big boys and traders are DUI, when the worm turns because they will be SOL because they are the market

Sep 22 03:46 PM

[enigmaman:]

Bad attitude! Reality is people are worth less now then they were ten years ago, there saving cut in half, there home values cut in half, highest unemployment in 26 years, foreclosures at all time record highs, 6 million more foreclosures to come, 65% of CRE loans are not eligible for refis, Admin that believes in higher taxes for business and individuals, cap and trade tax, health care reform and tax, Fed rates that will only go higher, manufacturing working at 68% capacity, 70% of GDP is from consumer demand which is DOA, did you say something about a bad attitude concerning investing, that is a result of reality.


On Sep 22 03:40 PM Tom Armistead wrote:

> Jeff, the reason I read SA is to get exposure to well-reasoned opinions
> on macro issues and market level. I appreciate your approach which
> is resolutely factual.
>
> As this situation has developed new information comes out every day
> and visibilty is improving. Jim Grant's change of stance is an important
> indication, he has a very good track record of looking at the facts
> and arriving a reliable conclusions.
>
> The bear market seems to have given some people the idea that extremely
> negative views on the economy and the market were somehow hip or
> stylish, but a bad attitude will only take you so far in investing.

Sep 22 03:55 PM

[Michael Clark:]

It's not just hindsight. I'm predicting the future as well. Economy bottoms and begins to expand 2019. Economy gains strength and is a dynamo of expansion 2019-2037. Economy tops is 2037. Study of the patterns in nature.

Let's touch bases in 2019.


On Sep 22 10:49 AM Shaftsinker wrote:

> Ah yes, the classic hindsighted engineer approach to the market.
> No one has ever failed to make this work. You'll be a millionaire
> in no time. It really is just that simple.

Sep 22 03:55 PM

[Michael Clark:]

The market goes up and comes down because of psychological reasons. Fear Number One: fear of missing the rally. Fear Number Two: fear of losing one's profits.

Rationality is how we 'talk' about the markets: 'oversold', 'undervalued', etc. It's how we rationalize our actions. But our actions are driven by emotions. Even the most rational investors are driven by fears. Even those who build a rational system to guide their investments (value investing, technical analysis investing, etc.) are haunted by fears that their system may not work, even if it has worked in the past for them. There is always a major fear element present when we are investing our own money. Perhaps that is why investing is addictive. It IS gambling, even if it has a nicer name; even if it is swathed in the nice normal clothing of reason, rational systems, and analysis. The Primordial fear of losing and the hope of winning keeps us coming back to the table again, back to the forest of Wall Street. Investing is a form of hunting. There are big game to be bagged in the woods. But there are dangers. Bears also live in the woods.


On Sep 22 03:46 PM enigmaman wrote:

> This rally is about fundamentals, not business but rather fiscal
> fundamentals, cheap money, dollar decline, over sold. This market
> will not correct for rational reasons, it will correct for psychological
> reasons and it wont be from internal forces but rather external surprise
> events that will blindside investors, that will cause the panic and
> without retail investors to feed off of it will be the big boys who
> feed on each other. Retail investors are MIA, insiders are going
> AWOL, big boys and traders are DUI, when the worm turns because they
> will be SOL because they are the market

Sep 22 04:10 PM

[Michael Clark:]

I agree, Enigmaman. A lot of Americans are angry. It appears that the game has been fixed by those who have the wealth and the power to fix the game. Yes, like Vegas individuals who are not part of the power elite can win at this game too. But that doesn't mean the game is not fixed. That just means the House ALWAYS wins, no matter what else happens.

A lot of people watched their life-savings be devastated by the mistakes made in Washington and Wall Street -- and then watched the people who made the mistakes get rewarded for their mistakes by billions of taxpayer money. No such reward for the small guy who lost have of his wealth. Angry, yes. There is a lot of anger.


On Sep 22 03:55 PM enigmaman wrote:

> Bad attitude! Reality is people are worth less now then they were
> ten years ago, there saving cut in half, there home values cut in
> half, highest unemployment in 26 years, foreclosures at all time
> record highs, 6 million more foreclosures to come, 65% of CRE loans
> are not eligible for refis, Admin that believes in higher taxes for
> business and individuals, cap and trade tax, health care reform and
> tax, Fed rates that will only go higher, manufacturing working at
> 68% capacity, 70% of GDP is from consumer demand which is DOA, did
> you say something about a bad attitude concerning investing, that
> is a result of reality.

Sep 22 04:16 PM

[Tom Armistead:]

The reality is that the market has been going up steadily since March 9th and standing on the sidelines growling has not made any money for anyone who did it.

I am as angry as anyone at the developments in the financial system and economy which have seriously reduced everybody's net worth except for the few, the chosen elite. I have written to my Senators and congressmen and every regulator who had any possible authority to change or control the situation. Very few responses.

Many of the games on Wall Street are rigged, but some are not, or even more mysteriously, are rigged in favor of the player. There is no other casino on earth where you can leave your money on the table for ten years and have more than you started.


On Sep 22 03:55 PM enigmaman wrote:

> Bad attitude! Reality is people are worth less now then they were
> ten years ago, there saving cut in half, there home values cut in
> half, highest unemployment in 26 years, foreclosures at all time
> record highs, 6 million more foreclosures to come, 65% of CRE loans
> are not eligible for refis, Admin that believes in higher taxes for
> business and individuals, cap and trade tax, health care reform and
> tax, Fed rates that will only go higher, manufacturing working at
> 68% capacity, 70% of GDP is from consumer demand which is DOA, did
> you say something about a bad attitude concerning investing, that
> is a result of reality.

Sep 22 05:57 PM

[untrusting ...:]

Battman,
Exactly correct. This author has zero performance results on his site. He probably held all the way down and is now back to only 30% down. Meanwhile, the author is pumping his advice to try and raise more "assets under management" so he can collect some more management fees.

When compared to top managers like John Hussman, who have stellar track records, and have the exact opposite opinion, we think we will give Hussman a lot more credibility.


On Sep 22 07:53 AM battman wrote:

> It's funny how these advisors talk about the 20% they just made.
> They act as if they weren't in the market for the 50% drop first.
> I'm glad you made back a fraction of your loss, but you're still
> underwater. I would have made the same simply holding onto my stocks
> that I had prior to the collapse which ALL came back since.
> This mini bull needs to be put in perspective. People are still DOWN
> money and the markets are still DOWN. Pretend you're a genius and
> rode the wave, but show me all your sell orders before the collapse,
> and maybe I'll be impressed.
> Besides, with a "globally diversified portfolio", you couldn't help
> but make money because of the dollars fall. If the dollar gains strength,
> the profit margin will fall.

Sep 22 10:37 PM

[umuculus:]

<< Michael Clark >>
So, your expecting to touch Bases with somebody in 2019. The Course of our Lives is as irrational and unpridictable as The Market. A lot of bad Things can crop up between now and then that might snuff out your Lights.
It doesn't Matter how healthy you are now or what great Shape your'in today.Your Future is in the Hands of Fate. And Fate loves to show up at Surprise Parties.
I'd like touching Bases with you in 2019,providing both of us are still alive.


I'd lo


On Sep 22 03:55 PM Michael Clark wrote:

> It's not just hindsight. I'm predicting the future as well. Economy
> bottoms and begins to expand 2019. Economy gains strength and is
> a dynamo of expansion 2019-2037. Economy tops is 2037. Study of the
> patterns in nature.
>
> Let's touch bases in 2019.

Sep 23 12:08 AM

[Jeff Miller:]

untrusting--

As I explained the last time you made a similar comment, there are legal rules for disclosing performance on a web site. I notice that you have dropped your assertions about Doug Kass and John Mauldin, who, like me, do not have mutual funds and do not post website performance.

John Hussman is a wise and experienced investment advisor, who has done well versus the market. He has a sound investment product. Any legitimate investor can get a complete report of how our program has done. Just send us an email. I invite comparisons with Hussman and also the performance of the overall market, but we cannot post it on the website.

Of course, that is not really the point. I am trying to write articles that discuss current issues of interest. Instead of commenting on the content of these articles, you attack the author or his service. I note that you have done the same in your comments on other authors.

We are supposed to be engaged in a discussion of issues, with emphasis on the merits of the article. Some of the most prominent SA authors have been wrong on the markets for many months, but we still consider their analysis on the merits -- as we should.

That should be our objective on this site. Just a thought....

Jeff


On Sep 22 10:37 PM untrusting investor wrote:

> Battman,
> Exactly correct. This author has zero performance results on his
> site. He probably held all the way down and is now back to only 30%
> down. Meanwhile, the author is pumping his advice to try and raise
> more "assets under management" so he can collect some more management
> fees.
>
> When compared to top managers like John Hussman, who have stellar
> track records, and have the exact opposite opinion, we think we will
> give Hussman a lot more credibility.

Sep 23 12:45 AM

[Jeff Miller:]

tom -- Thanks for your comment. I know that many people read these articles without making a comment. I hope that many share your approach.

You may have noticed that I have been, for some time, one of your "followers" on Seeking Alpha. I have been impressed by your observations and often go to articles where you have made a comment. These are topics that I might otherwise have missed.

Thanks for your contribution.

Jeff


On Sep 22 03:40 PM Tom Armistead wrote:

> Jeff, the reason I read SA is to get exposure to well-reasoned opinions
> on macro issues and market level. I appreciate your approach which
> is resolutely factual.
>
> As this situation has developed new information comes out every day
> and visibilty is improving. Jim Grant's change of stance is an important
> indication, he has a very good track record of looking at the facts
> and arriving a reliable conclusions.
>
> The bear market seems to have given some people the idea that extremely
> negative views on the economy and the market were somehow hip or
> stylish, but a bad attitude will only take you so far in investing.

Sep 23 12:50 AM

[Michael Clark:]

I've been making money and growling. I'm not an ideologue when it come to the market. I follow my system -- when it says get in, I get in. But I'm a lot less idealistic about these markets and capitalism than I was ten years ago.


On Sep 22 05:57 PM Tom Armistead wrote:

> The reality is that the market has been going up steadily since March
> 9th and standing on the sidelines growling has not made any money
> for anyone who did it.
>
> I am as angry as anyone at the developments in the financial system
> and economy which have seriously reduced everybody's net worth except
> for the few, the chosen elite. I have written to my Senators and
> congressmen and every regulator who had any possible authority to
> change or control the situation. Very few responses.
>
> Many of the games on Wall Street are rigged, but some are not, or
> even more mysteriously, are rigged in favor of the player. There
> is no other casino on earth where you can leave your money on the
> table for ten years and have more than you started.

Sep 23 02:27 AM

[battman:]

My comment wasn't specific to this author, but just to investment advisors in general, or others who are bragging about making money now, after having lost their shirt from the crash.


On Sep 22 10:37 PM untrusting investor wrote:

> Battman,
> Exactly correct. This author has zero performance results on his
> site. He probably held all the way down and is now back to only 30%
> down. Meanwhile, the author is pumping his advice to try and raise
> more "assets under management" so he can collect some more management
> fees.
>
> When compared to top managers like John Hussman, who have stellar
> track records, and have the exact opposite opinion, we think we will
> give Hussman a lot more credibility.

Sep 23 10:32 AM

[RiskAverseA...:]

Everything on the technical front reads bearish. Everything. And then, too, fundamentally, with debt increasingly crowding out equity and with the means to further leverage this debt now slumbering with T-Rex it would be difficult imagining circumstance where equity is more easily assumed dead money. That criminal prosecution of the greatest Ponzi scheme in recorded history -- structured finance -- has been restrained is a loud-and-clear clue that, time is being afforded for the riskiest of assets to be passed off onto suckers. That there is even any doubt only makes me wonder how rapidly might total collapse unfold. In other words, how big might be the price gap separating suckers from knowledge they have been had?

Sep 24 09:30 AM

[Nadeem Walayat:]

</p>
<p>I wrote in Mid March to ignore corporate earnings - in the article</p>
<p><A href="www.marketoracle.co.uk...">Stealth Bull Market Follows Stocks Bear Market Bottom at Dow 6,470</A></p>
<p>Quote - </p>
<p>Yes I am aware of the on-going corporate earnings contraction forecasts that SUGGEST stocks should be going MUCH lower, though some of the estimates of where the market should be heading to are pretty ridiculous, were talking ridiculous price levels of as low as DJIA 400! However the stocks bull market was also elevated to Dow 14,000 on the basis of corporate EARNINGS forecasts that suggested that Stocks should go MUCH HIGHER. So what does that tell you ? <STRONG>It tells you that what you tend to read is always suggestive of the JUNCTURE being FAR AWAY, NOT imminent</STRONG>. <SPAN class="style1">IT IS ONLY LONG AFTER THE FACT, AFTER MARKET'S HAVE ALREADY MOVED THAT THE JUNCTURE IS RECOGNISED AND ANALYSIS PRESENTED AS TO WHAT WENT WRONG WITH THE SCENERIO THAT CALLED FOR MUCH LOWER PRICES. </SPAN></p>
<p>Similarly wide spread consensus today exists for SHARPLY LOWER CORPORATE EARNINGS going into 2010 THAT MUST MEAN MUCH LOWER STOCK PRICES. However this earnings analysis that is so abundant today, should have been presented OVER A YEAR AGO ! in October 2007 I.e. at or near the market peak! So that ordinary investors could actually ACT on the information. NOT NOW AT THE MARKET BOTTOM ! We are again seeing REASONS as to WHY INVESTORS should avoid investing INTO the Stealth Bull market!, precisely as we all witnessed what was effectively Bullish propaganda during the final stages of the Stocks Bull Market, so we are NOW witnessing what is effectively BEARISH propaganda in the final stages of the Bear Market. Now, don't get me wrong, I am not saying that the analysis is not genuine, what I am saying is that IT IS IRRELEVANT! As it is always much easier to build a scenario in favour of a trend that has been in force for sometime that has generated much data and analysis in support of why it exists and therefore it should continue for much longer, then to <SPAN class="style1"><... <STRONG>Out side of the Box"</STRONG><... to disregard bearish data that has been magnified by the growing consensus that really should have been known more than a year earlier in favour of the technical picture that as the analysis of <A href="www.marketoracle.co.uk...">October 2008</A> stated, that <SPAN class="style17"><... we are NOT heading for a Great Depression</SPAN> (as I will further elaborate upon in the Q&amp;A below) and<SPAN class="style17"> b. The stocks bear market HAS fulfilled its bear market objectives in terms of price and time</SPAN>, more than anyone could have been imagined a year ago!</p>
<p>But now, even after the stock price wipeout to below Dow 6,600. The analytical weight bearing down of overwhelming information is that in support of a continuing meltdown for even as long as several more years towards Dow targets such as 4,000 or even as low as 400 by what can only be termed as perma-bear psychology. Remember Dow 14,000, NO ONE PAID ATTENTION to the perma-bears at that time. As the market was firmly in grip of the perma-bull psychology which was eyeing Goldilocks levels of 18,000. There were even calls that China's SSE at 6,000 should go much higher, despite being on a P/E of about 60. The uber bullish media played on the fact that the NASDAQ peaked on a P/E north of 100, so much for the earnings factor! In fact I pointed out in November 2007 that investors should get out of china AT SSE 6,000 and to forget SSE 9,000, its going straight down towards an initial target of 4,000. Instead today earnings is brought to the fore to support a further collapse of stock prices to what is commonly referred to as reversion to below the mean, <SPAN class="style1">AS AN EXCUSE TO FALL FOR THE TRAP OF PERPETUATING A DISTANT JUNCTURE BOTH IN TERMS OF PRICE AND TIME</SPAN>. Therefore repeating the same mistakes that occur at ALL market Junctures ! Which is DATA is PUT AHEAD of PRICE ! To which my answer is this - What are you trading ? Are you trading the Corporate Earnings Data or the actual Stock Index ? </p>
<p>The only thing that actually matters is the PRICE ! NOTHING ELSE! and I mean NOTHING ! Not earnings, Not fundamentals. Listen to the PRICE or you WILL miss the Stealth Bull Market! </p>
<p>

Oct 04 10:00 AM