13-week rally about to be unlucky for some
Posted on 06 June 2009 with no comments from readers
You can take your pick: is this 1932 with its 92 per cent rally, or more like May 1929’s 26 per cent surge over 13 weeks, the same length of time that the current rally has been running since the March 6th low, and followed by the October crash?
if we take last autumn as equivalent to the Wall Street Crash of 1929 then May 1929 does not look a good point for a comparison. The dive in markets in June 1930 seems far more relevant as a comparison (see chart).
Self-fulfilling rally
Then as now a combination of Wall Street and anxious politicians managed to persuade the pubic and some informed investors to come back into the market to take advantage of stocks at bargain prices. The rally became somewhat self-fulfilling as good news from the financial markets was interpreted as positive for Main Street.
Indeed, the main reason to be skeptical about today’s rally is precisely the same as in 1930: when trade crashes as it has this year there is no recovery for years, and what is seen to be a recovery later emerges as an illusion.
The collapse of global trade and exports this year has been huge and without precedent, and actually bigger than in 1930. Global air freight, for example, is down 20 per cent. Exports from China and Japan more than 25 per cent.
Global recession
All over the world business has suffered a massive collapse in orders. And where improvements have been noted does not necessarily bode well for recovery. How are higher oil and raw material prices going to assist a recovery? Surely they are the next down leg.
The question then in markets is how long it will take for financial markets to wake up to reality? Usually markets get technically oversold and then cool off, and after 13 weeks that is likely the position now being reached.
Then the follow through will be some bad news which continues to take the market down over the summer months. Those who did not sell in May and go away might soon live to regret it.
no Comments posted by readers:
I couldn’t agree more. My take on the current bear market rally can be seen on EzineArticles.com. Also this post at my Political Blog gives my theory on when this rally will reverse. With so many people out of work the economy cannot recover unless their is innovation to make up for lost productivity. Without job creation or value creation in some major industry investors will find this is a much bigger economic disruption than they currently believe.
Your view is very negative. 1930 and today situation is different.
The basic points that you missed, are that today’s market recovery is leaded by liquidity. The crisis that we passed was a liquidity one. The money liquidity was reduced, basically bacause the velocity was reduced. The volume of money was here all the time but had a low velocity. Now, the velocity becomes higher, plus the markets gained an uptrend momentum. The existent money liquidity is enough to retain the rally.
Furthermore, the valuation through P/E ratios, Dividend Yields, Price to Book Values etc, are still very low + the yields of treasury bonds and bank deposits are very, very low.
So, the psychology is good and the investors think: “Why keep money in Bank with zero yield, when I can have a part of my money to some good stocks, with low valuation and high Dividend Yield?”.
So, the investor puts more money in the stock market.