It's Not the Day of Reckoning Yet
06/07/2010 12:00 pm EST
Kelley Wright, managing editor of Investment Quality Trends, thinks the primary bear market will re-assert itself, but not for a while. Then, look out.
Every primary trend undergoes counter-trends, [which allow] the market and its participants to “collect their breath” and to correct the inevitable excesses from the most recent advance or decline.
The counter-trend rally that began in March 2009 is a perfect example. Having declined for the better part of 17 months, the market had become oversold and [needed] a respite.
As the rally expanded, it was inevitable that the hyperbole would overtake the reality. [But] in historical context, it is just a garden-variety counter-trend rally. As sure as night follows day, however, this counter-trend rally will run its course and the primary trend, the bear market, will take hold again. [But] I don’t believe that time is now.
Yes, the market was overbought, over-loved, and over-hyped; so what else is new? In my opinion, though, the events that have transpired since the recovery highs of late April are better characterized as a panic than a crash.
A crash is typically the result of monetary, economic, or political event(s) that gather over time, and then stock prices waterfall over a period of several months, with losses exceeding the 20% threshold, the widely accepted definition of a bear market.
A panic, on the other hand, is typically short-term news-driven, although there is usually some corresponding technical justification for fear levels to spike, whereby investors fall over each other heading for the exits.
Yes, the market internals have been deteriorating. Yes, there has been significant institutional selling and quite a few distribution days. Is the European debt crisis over? Not by a long shot. Will the euro fall apart and the European Union come crashing down? Who knows?
What I do know is that despite our problems here in the US, the dollar has caught a bid and money has been pouring into Treasuries, driving interest rates down to the lows once again.
While there are signs of inflation in pockets of the economy, inflation as measured by the Federal Reserve is benign, and there is equal evidence that deflation is more than a whiff in the air. This will buy the Fed more time, meaning short rates will remain low for an extended period.
While I expect volatility to remain high, I believe the market has one more move in it. I expect to see the rally resume and carry into the summer; probably late August to early September. In Porky Pig fashion, though, that’s all folks.
By [then,] I believe that the hopes for economic recovery, which were stoked by gross domestic product growth in [the fourth quarter of] 2009 and [first quarter of] 2010 due to inventory replenishing, will begin to diminish as the stimulus wears off and the economy slows once again.
The market only fears two things; a sustained hike in interest rates and recession. While interest rate hikes are probably a ways off, a slowing economy could lead to the dreaded double dip. That, in my mind, will be the silver bullet.
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