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Sucker Rally?

The breakdown of a ceiling on the Dow Jones can be a harbinger of doom. Are we moving into a suckers' rally, when the bubble will inflate just before bursting? There are indications that worry people.

Tom McClellan of MCOscillator writes about a fund group whose in- and outflows are easy to track, Rydex. Unlike most mutual funds, this firm lets its investors trade day to day and tracks their moves. Tom notes that the Rydex Money Market Fund is below $1 bn in assets for the first time since Feb. 2001, and that its 1.5x leveraged Nova Fund is at its highest level since before Lehman Brothers went down the tubes in Sept. 2008.

Tom explains that even in a period with declining money supply (like now), you can get stock market excessive rises if more of the restricted money supply moves into stocks. He cited Friday's buying frenzy as a symptom of unusual motivation to buy shares, because typically, the end of the week sees fear rather than greed predominate.

There are other indicators of excess bullishness as well. EPFR, a Cambridge, MA fund tracker, reports that emerging market equities inflows have reached a 24-week high in the 1st week of April. Michael Kurtz from Macquarie (a brokerage) notes that the big change in emerging market investing was the return of China destination stock buying. But why did China rebound? From the “sheer exhaustion of selling pressure”, Kurtz concludes. “The FY 2009 earnings season has not ben robust enough to restart the upgrade cycle” he remarks. He feels there was a shortage of strong forward guidance from reporting companies, a lack of earnings growth visibility, and most worryingly, a lack of dividend increases.

Kurtz's caution contrasts with Robert Hsu's latest e-mail blast to garner subscribers for his China Strategy newsletter. Writing about a China IT company, Hsu says to “back up the truck” to buy this stock which he calls also “a super-strong buy”.

Happily, the share he is so keen on is a Global Investing share, already doubled from what we paid for it. So too is one of Michael Kurtz's value plays. We also own a beaten down property company in China he likes too. You save money by subscribing to our newsletter which moreover covers the non-US world, not just China. For more details, subscribe to