For the past seven weeks there has been an impressive, rip roaring 30% bear market rally from the March lows. There has been no fundamental reason or glimmer of hope that truly spells the end of this recession. Instead what we have are bank earnings that no one in their right mind can trust with the amount of accounting trickery taking place. Consumer credit card interest rates skyrocketing. Record foreclosures in both residential and commercial real estate. And a parade of uninspiring earnings and guidance from the S&P 500.
Room for gloom and doom
The market has been ignoring bearish news which could be viewed as bullish, except it is also ignoring the fundamental macroeconomic picture. Emerging markets in Eastern Europe and Asia are hard hit by the global economic crisis. Some are on the brink of default with their sovereign debt, forcing them to seek loans from the IMF. Others are rapidly devaluing their currencies. Either path demonstrates signs of extreme financial stress.
There is no end in sight to the problems with real estate, which led us in to this mess. We have yet to see a meaningful bottom in housing and now commercial real estate is suffering. GM is on the verge of bankruptcy with few alternatives and to top it off global GDP will likely shrink the first time in decades.
Froth at the top
On a technical basis the S&P 500 seems to be overextended. It has been overbought too quickly for most of the momentum to be sustainable. In the last week we’ve seen a lot of that momentum fall to the wayside. While consolidation is normal, we can’t with any confidence declare this as more than a bear market rally to which an abrupt and painful end may be in sight. The bank stress tests are expected to start being released to banks this Friday and to the public in early May. The old adage “Sell in May” could be a very meaningful pronouncement for this Summer.
Keep your powder dry
I recommend using this rally as an opportunity to raise cash, sit on the sidelines and wait for a good buying opportunity for the long term. Short term the best position is a short bias. I don’t feel that being constructive after such a massive build up, especially when some of the larger gains have been on light volume, is warranted. Possible support exists at 850, 830, 800 and 775. At this point it is conceivable that we also retest the lows in the 660s over the Summer depending on how severe some of the interim problems become.