Monday, August 10, 2009

Keep On Party'in

The Wonder Rally Continues
During the Great Depression, there were eight distinct stock market rallies. The rallies lasted an average of 11.3 weeks during which time the average increase was 52.6%.
The rally that began in March of 2009 is now 22 weeks long and has seen the S&P 500 rise 49.4 percent. Which is to say, it is now almost double the average duration of the average bear market rally during the Great Depression.
More interesting is that the current rally is eerily parallel to that of the longest bear market rally of that era – a 52% rally that came at the very beginning of the depression and that also lasted 22 weeks.
The government, as well as the Wall Street insiders who have been selling their shares at a record pace, would like you to think that the worst is behind us – and point to the latest unemployment numbers as proof of that. The latest unemployment stats do show a drop for the first time in 15 months, though most fail to mention that the drop in unemployment is largely due to people running out of benefits and falling out of the program.
Showing a modicum of candor, Laura Tyson, one of the president’s top advisers, was heard to say by the folks from Bloomberg...
“We’ve had one number that’s been slightly stronger than expected,” she said. “It’s pretty hard to read a single month as creating a trend. Most of the forecasts are still that the unemployment rate rises through till the end of the year.”
So, what’s it going to be – a continuation of the wonder rally (as in “I wonder why anyone would be investing at this point”) or a return to volatility and a steep downward slope for the market?
According to report in Bloomberg today, traders are now betting that the rally is about to come to a screeching halt…
Aug. 10 (Bloomberg) -- Options traders are increasing bets that the steepest rally in the Standard & Poor’s 500 Index since the 1930s won’t survive September, historically the worst month for U.S. equities.
Traders were betting the VIX, a gauge of expected stock swings, would increase 13 percent in the next five weeks, according to futures prices at the end of last week compiled by Bloomberg. That’s the biggest spread since August 2008, before the S&P 500 suffered the steepest two-month plunge in 21 years. The indexes have moved in the opposite direction 81 percent of the time over the past five years, Bloomberg data show.
My well-documented belief is that we’ll see another leg down in equity markets – and for many commodities as well – as economic realities associated with everything from housing and commercial real estate to high levels of unemployment unfold. Further, that as the numbers for housing and unemployment turn around for the worse, the level of disappointment will send equity investors scrambling for the exits, causing a sharp, steep setback.
That said, I think it’s important to keep an open mind and to consider alternative scenarios.
For instance, there’s no ignoring that the government has pumped a lot of money into the system. Money that is now making its way into the economy and that will likely pick up momentum as “shovel ready” projects and outright giveaway schemes such as Cash for Clunkers come on stream.
With the inevitable setbacks, this spending could help keep the stock market artificially at these levels for awhile longer, as it did in Japan throughout the period that the government engaged in aggressive quantitative easing.

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