13-week rally proves unlucky: sell, sell, sell!
Posted on 16 June 2009 with no comments from readers
If we count last week as a turning point then the 13-week stock market rally seemed to have finally come to an end yesterday with a two to four per cent fall in all the major indices around the globe. It should be mainly downhill from here, but how low will stocks go?
The managing director of the IMF, Dominique Strauss-Kahn yesterday reminded bullish spirits of the reality of the global economy, saying that ‘the large part of the worst is not yet behind us.’ He noted that 2009 would be the first year of negative global growth since the 1930s, and hoped ‘2010 may be be better.’
Correction time
From a stock market perspective you do not need a PhD to interpret this: stock markets have gotten well ahead of any supposed recovery in the economy and are due for a substantial correction.
That means calls for the G8 countries to begin winding up their stimulus plans are also very premature. Nobel prize winning economist Paul Krugman has been rightly warning leaders not to pull the carpet out from under the global economy too soon.
To change the analogy what we have is a patient in intensive care signing up for a marathon before the doctor has even transfered them to a normal ward. The global economy has to learn to walk again before it can run.
Indeed, standby for another painful unwinding of global financial markets as those financial institutions, companies and individuals briefly resuscitated by the huge global bailouts from governments once again have to face headwinds that they may not have the capacity to survive.
Sell, sell, sell
In this atmosphere the only logical thing for stock market investors to do is to sell, and that is what they have started to do, boosting the dollar and bonds in the process. The overblown commodities market has also taken a hit with gold holding up best.
So this could be an ugly summer for equities which have rallied far too high and far too quickly for the worst recession since the Great Depression. Closing positions and waiting for another opportunity to buy quality stocks at lower levels looks obvious.
