Alan Young

The 'W' Shaped Recovery: How to Position Your Portfolio

The economic data are not in dispute. But stock valuation is relative. We had essentially the same economic problem last summer, with the $SPX at 1250; that was full-scale denial. If we had overcome the denial and re-evaluated the stock market, WITHOUT the panic following the Lehman meltdown, a descent to 800 or 900 would have been considered a severe correction, proportionate to the bad economic problems. But coming UP to this level arouses more suspicion. You think the bad economic data isn't priced in; I wouldn't be so sure.

Some other points to consider:

(1) The worst stocks rallied most because they were the most oversold, not because their shortcomings are being ignored. This is not, IMO, a good indicator of the quality of the rally.

(2) The market is not responding ONLY on emotions and hype; market makers (at least GS, if not others) are jamming buy orders in to push prices up at tactical moments. It would be treacherous indeed to trader, much less invest, without being aware of this. But it's also unwise to treat the resulting price spikes as mere delusion. There is real money to be made in the bear-rally trade.

Personally, I think another leg down is a realistic expectation. However, it's more important to trade on what the market is actually doing than to be "right" about what it is supposed to do next. We don't know for sure what will happen; for all we know, the "greater fools" who buy "overvalued" stocks today might be the winners at the end of the month, or the quarter, or the decade.