Why You Shouldn’t Chase The Current Stock Market Rally
Thursday, August 6, 2009
by Marc Lichtenfeld, Senior Analyst, Smart Profits Report
I am expecting a significant stock market correction at any time.
If you’re a regular reader of my columns, that won’t come as a surprise to you. And I’m not alone in that camp either. Analysts, strategists and investment directors all over Wall Street have been hesitant to put new capital into the markets.
For example, one hedge fund manager told me that he just can’t buy stocks at these levels - despite complaints from his partners who expect him to be fully invested.
And a technical analyst friend reports that the vast majority of his institutional clients are bearish.
And why not? We’re still hemorrhaging jobs… housing still stinks… and U.S. retail and food sales plummeted 9% in June, compared with June 2008.
But the market keeps going up.
This is what is known as climbing the wall of worry. Let me explain what this means - and what it means for us when it comes to investing…
Bulls vs. Bears In A “Pistols At Dawn” Showdown
The wall of worry is when stock prices climb, despite investor sentiment being negative and there being more reasons for them to fall than rise.
Sound familiar? It’s what we’ve got at the moment.
For example, the most recent Bull/Bear ratio among advisory services was 1.03. That means for every 1 bear there is 1.03 bulls. The average over the past 39 years is 1.73, so the current reading is rather bearish.
In fact, the American Association of Individual Investors’ (AAII) survey has turned up more bears than bulls for weeks. It was only this week that bulls outnumbered bears for the first time since June.
And the media certainly isn’t in a rush to report any good news…
Who’s Afraid Of The Big, Bad Market?
If there’s one thing the mainstream financial media does perfectly, it’s hyping news to the point where they make you scared. And they’d love to keep it that way, too. After all, if you’re scared, you’ll tune in to get additional information.
Don’t listen to ‘em. The best time to get into stocks is when things are at their worst. Because by the time they get better and the masses pile back into stocks, the majority of the gains have already been realized.
So with all that negative sentiment, does that mean you should chase this rally?
Don’t Try To Run After This Erratic Market
Take off your running shoes - don’t chase this rally.
The investment seas are still rough and we’re likely to see them get rougher.
For example, commercial real estate is a disaster. There are still financial institutions that are teetering. We have industrial overcapacity. We’re still seeing heavy job losses, too. And even many of the folks who manage to find work after layoffs are making significantly less than in their previous jobs.
Remember how bad things seemed just a few short months ago? I don’t know if we’ll get back to those depths of despair. I certainly hope not. But I do expect stocks to fall and investor sentiment to deteriorate.
And just when it seems as if things can’t get worse, another sensational buying opportunity will present itself.
Marc Lichtenfeld
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2 Responses to “Why You Shouldn’t Chase The Current Stock Market Rally”
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Good articler, advice, and commentary. To the point, no froth.
Wish you could provide some guidelines as to when we will be at the top of the middle peak in the W. Soon or in September/October?
Thanks.
Its GS computer programs(or the governments computer trading programs)-they are in the bull phrase right now and they control so much a person has to trade with them. The question is when do they change the switch to the bear side-they have to be short to make that work and have they pulled enough investors in to go short. If this is the government playing the markets is this how they are taking care of the deficit(GS and the trading banks billion dollar bonus at a 50% plus tax rate can sure help the deficit);however after they have wiped out all the investors who are they going to fleece next-each other??? OOPS that has already been done-I know now they are working and have been for a while on the Federal Reserve and the US government.