themackattack

Wall of Waiting Cash Could Drive Equities Higher

The market appears "overbought" in the classic sense, and who wouldn't think it a bad time to buy after one of the largest two-month rallies in history. I have to admit that my expectation was to see some profit taking after such a monumental rally, and I was positioning myself to capitalize through some short positions.

But then I began to see things through a different prism of potential. First, let me start by saying that I believe it is a bit "contrarian" to be bullish at this point, precisely because the market has risen so much and so quickly. In some ways a continued bullish move would surprise us all because it would be historically inconsistent (and, therefore, contrarian).

We have to remember what the context is for this substantial rally -- and that is the second most severe decrease in the US stock market in history, at a pace that exceeds nearly every previous decline. Further, the decrease the market suffered from Jan 2009 to March 2009 was particularly severe, and neared catastrophic levels (failure of annuity companies, pension funds etc). The reality is the market was priced in late February as if the American economic system was on the verge of collapse.

Over the last two months it has become very clear that the American economy is not on the verge of immediate collapse (I'm not saying it won't collapse in the next few years). This realization has driven the market up rapidly, and justifiably so. Now, why would the market continue to go up after such an extreme rally? Well, quite simply the market has moved from a pricing level that reflected an expectation of economic collapse to a market level that presupposes a continued extremely severe recession. If economic statistics should begin to show recovery at all (and some are beginning to) we will quickly see the market priced at a new level, one that is more consistent with normal recessions or post-recession recovery.

People are so consumed by the magnitude of the current market appreciation, but when looked at in the context of the extreme magnitude of the recent decline, one can argue that we've only reached equilibrium as opposed to being "overbought". There is more to being truly "overbought" than just what the technical indicators might be saying.

Lastly, I believe that this bullish trend and recent rally has probably bridged the gap to the point in time where we begin to see the government's economic stimulus begin to have a significant impact. If you don't think nearly a trillion dollars of economic stimulus is going to at least create the appearance of recovery, you are mistaken. It's likely that the recent imaginary "green-shoots" will lead to stimulus created "green leaves".

I don't know what will happen in 2010 and beyond, but I will be positioning myself for at least a short - term market bounce to Dow 10k within 2009.