Seventh Inning Stretch, or Delay of Game?

All the hoopla I am hearing about this recent “bear market” rally a.k.a. our recent “bottoming” is becoming a bit disconcerting, although it was clearly expected as I noted in Good News Novelties in January.  The media loves one thing, to sell headlines whether by paper or by click-throughs.  It is a sure bet that pessimism is a hot commodity in a sea of optimism, and now that the tide is out, optimism is the new best seller over pessimism. 

Social order, of the less-than-scientific-kind, favors Newton’s First Law of Motion which would indicate that the current optimistic wave will continue through inertia until one-hell-of-a jetty of bad news is able to break it (i.e. Q1 earnings and Q2 revisions).  That said, the recent trickles of continued bad news have been ineffective during this rally. 

Just before this rally began, on March 5th I posted a number of links indicating some of the best technicians thought you’d be crazy to be short in early March see Signs of a Bounce.  Well now we have met that bounce, and some investors (or stock jockeys) are cheering that the worst is behind us.  The bears still favor fear mongering, leaving most of us scratching our heads to see which side to lean towards.  The only fair assumption is that we are somewhere between the first and the last inning.  My guess is that this is not the Seventh Inning Stretch on the way to recovery but rather a “delay of game” on our deflationary decent.

Some of my favorite and more prescient financial bloggers and authors are offering new warning signs.  Some of the better clippings are noted below.  I’d expect the current wave of optimism to come crashing down when and only when it would take a financial imbecile to realize that the “bottom” has not yet arrived, usually after its “too late”.  At that point retail investors are sure to have repeated their age old mistakes of buying high and selling low.

For all the hemming and hawing about how much money professional traders make year after year, its sad and funny to admit that contrarian herd psychology is a fail-safe trading strategy.  If there is one thing that bothers me most is the thought that every day the vix goes lower, the potential for its reversal grows larger.

Bear Market Rally? by Barry Ritholtz – Is this the real thing, or just another Bear Market rally? So far, we’ve had 4 runs of about 20% each.  Here are 3 things to keep in mind:…

The Economy’s ‘Green Shoots,’ Real or Imagined by the New York Times Editors – Ben Bernanke, the Federal Reserve chairman, said on CBS’s “60 Minutes” that he is seeing “green shoots” showing up in the economic landscape, “as some confidence begins to come back.” … What are the bright spots in the economy? Is there reason to believe that Mr. Bernanke’s view is not wishful thinking?

The Incredibly Shrinking Market Liquidity, Or The Upcoming Black Swan Of Black Swans by Tyler Durden – “Anyone who is doing anything sensible right now is either losing money or is out of the market entirely.” These are the words of a quant trader, who is seeing something scary in the capital markets. Scary enough to merit a warning that we could be on the verge of another October 87, August 2007, or January 2008….

How Far Can You Trust This Rally? by Kopin Tan – “To buy the equity market at these levels,” says BarclaysCapital strategist Barry Knapp, “implies a degree of confidence in a sharp recovery that doesn’t seem to jibe with the available evidence.”

Is That Recovery We See? by John Mauldin – I think, given the track record of the analysts who project a 74% rise in earnings for financial stocks in the 4th quarter of this year, that we should remain a tad skeptical.

The Imminent Disinformation Schism by Tyler Durden – The real split will be of naive, easily-manipulated, small-time mom and pop investors, who only care about looking at their daily yahoo finance screens and 401(k) statements, seeing more black than red, and only focusing on what happened in the immediate past, and the forward looking taxpayers, who see the upcoming budget deficit fiasco, the social security ponzischeme, the Medicare/Medicaid debacle, the ridiculous underfunding in public and corporate pension funds, the rising city and state taxes, the shuttering factories, the rising unemployment, the plummeting American production base, the “seasonally” upward-adjusted economic data coupled with consistently downward revised prior economic releases, the increasing savings rate and the multi trillion discrepancy in consumer purchasing power.

S&P 500 50-Day Moving Average Spread by Bespoke Investment Group – The S&P 500 is currently trading 8.56% above its 50-day moving average, which is its most overbought reading since May 2001.  As shown in the historical 50-day moving average spread chart of the S&P 500 below, these levels are rarely reached, and when they are, pullbacks or sideways trading usually ensues.  However, oversold levels hit multi-year extremes and kept getting more and more oversold at the end of 2008.  While it’s likely that the market will take a breather, anything can happen in this market.

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