FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.

posted on 23 March 2016

How To Make Sense Of A Pathological Rally

by Michael E. Lewitt

Money Morning Article of the Week

Stocks rallied for the fifth consecutive week, erasing the losses suffered by the Dow Jones Industrial Average and S&P 500 to start the year. Fears of recession have receded and investors are now fretting that they may miss out on the next big thing if they don't dive back into the markets.

They should be careful what they wish for.

While it may be gratifying that the market didn't fall completely out of bed in the first quarter, there is still ample reason to believe that we are in a bear market and that recent gains are going to reverse sooner rather than later. One reason stocks rallied last week was that the Federal Reserve once again refused to take an opportunity, when market conditions were relatively stable, to raise interest rates. That leaves only investors to worry about when it might actually decide to do its job.

Bets are rising on that time arriving in June with the employment improving and inflation rising. The Fed, however, has plenty of company in terms of central banks continuing the easy money regime that has dominated markets since the financial crisis.

In recent weeks, the European Central Bank, Bank of Japan, People's Bank of China, Bank of England, and Norwegian and New Zealand central banks have also made new easing moves. This has resulted in negative interest rates in many of these regions, a catastrophic policy result that destroys capital and weakens economies. Investors may be celebrating now but they will be mourning these policies later. The world remains on an unsustainable path of massive debt creation and slow growth that is going to end in tears.

The Dow Jones Industrial Average gained 389 points, or 2.3%, to 17,602, last week. And the S&P 500 jumped 27 points, or 1.4%, to 2049.58. Incredibly, both are now only 4% below their record highs, signaling record complacency and cluelessness on the part of investors. The Nasdaq Composite Index added 1% to 4795.65.

Markets are in Denial Now

Many analysts are pointing to the fact that the Dow Transports are now in bull market mode -having risen 22% from their low on January 20. The fact that the transports are rallying while oil is also rallying is odd because higher energy prices are generally considered bad news for airlines and railroads.

Positive data on port volumes and container shipping looks better than it is due to the impact of work stoppages last year at West Coast ports. In fact, shipping data is still lower than 2014 in many cases. But in markets where 75% of the trading is driven by computers, such things are overlooked and momentum wins the day...Until it hits a wall. Look for the transport rally to end sooner rather than later.

Markets have also been encouraged by the rally in oil prices, which corresponds to a weakening dollar. The dollar is weakening after the Fed failed to raise rates, but the race to the bottom among central banks will soon resume and the dollar is expected to resume the rise that began in early 2014.

When it does, oil will find it hard to keep rallying regardless of supply/demand factors, which may not be deteriorating further but are only improving marginally. The outcome of the upcoming OPEC meeting in Doha, Qatar may give oil a further boost, but King Dollar will prove decisive in determining how much farther oil can run.

U.S. stocks also rallied despite the hand-wringing in the Republican Party regarding the potential candidacy of Donald Trump in November. The fact that markets don't seem bothered by Mr. Trump leading the Republican ticket suggests one of several things: they don't believe he will survive a brokered convention this summer; they don't believe he can beat Hillary Clinton in November; or they think he will get his act together and start acting more presidential in the near future.

Markets also may be in denial - an exercise in which they often engage when the facts don't fit their predilection to dive off the cliff. They tend to only try figuring things out once they are lying in a heap with their bones broken.

Based on his behavior and comments since he declared he was running for president last June, a Trump presidency should terrify markets. The problem may be that a Clinton presidency is hardly more reassuring. That should also lead investors to be battening down the hatches rather than chasing overvalued stocks to higher levels. Not to put too fine a point on it, but investors are acting like idiots.

Don't say I didn't warn you when the bear market resumes.

The Hedge Fund "Masters" Have No Clothes

One of the more comical aspects of the current rally is the parade of know-nothings touting the recover in the junk bond market. This market has seen large inflows over the last month into junk bond mutual funds and ETFs as the average spread and yield on the Barclays High Yield Index have dropped from over 10% and 800 basis points to just over 8% and 640 basis points, respectively. But this is happening as the default rate is starting to rise significantly. And more energy and commodity companies are lining up at bankruptcy courts around the country. Only the strongest issuers can raise new capital.

Investors should not be tempted back into this market. There will be higher defaults, poor liquidity and lousy returns in the months ahead.

It will be interesting to see how much investors are actually profiting from the market recovery. In February, many hedge funds continued to perform poorly. Last week's news was dominated by the crash-and-burn of Valeant Pharmaceuticals International Inc. (NYSE: VRX), which continued its well-deserved slide into oblivion by dropping to $27 from $70 after announcing more bad news on Tuesday.

Readers will remember that the stock peaked at $260 last summer. Hedge fund manager Bill Ackman accomplished the rare feat of losing over $1 billion in a single day on this stock - along with The Sequoia Fund, which lost even more.

At some point, investors may figure out that paying so-called Masters of the Universe 2 and 20 to buy stocks that they can buy on their own - without paying such egregious fees or locking up their money for years - doesn't make a lot of sense. Until then, they will surrender their money to the egos of people who only think they are smarter than everyone else.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Investing Post Listing

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.

You can also comment using Facebook directly using he comment block below.

Econintersect Investing


Print this page or create a PDF file of this page
Print Friendly and PDF

The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.

Take a look at what is going on inside of
Main Home
Analysis Blog
Comments on Feyerabend’s ‘Against Method’, Part III
Federal Repression System
News Blog
Schiaparelli's Descent To Mars In Real Time
September 2016 Existing Home Sales Still Not Excellent
September 2016 Leading Economic Index Improves Indicating Moderate Growth Ahead.
October 2016 Philly Fed Manufacturing Survey Declines But Remains In Expansion.
15 October 2016 Initial Unemployment Claims: Rolling Averages Marginally Worsen
Infographic Of The Day: Real Estate Bubbles, The Six Cities At Risk Of Bursting
Tesla Is Playing The Long Game
Name Dropping, Clinton Likes To Mention Herself
The Ability To Enforce Mandatory Migrant Quotas Is Slipping Out Of The EU's Grasp
2016 Winners And Losers Against The Dollar
October 2016 Beige Book: Reading Between The Lines - The Rate Of Economic Expansion Marginally Improved
Clinton Vs. Trump: A Case Of The Lesser Of Two Evils
Inside The Post Office Railway
Investing Blog
The 401k Plan Manager 17 October 2016
How To Insure Your Stocks And Make The Stock Market Pay For It
Opinion Blog
Prop. 51 Versus A State-Owned Bank: How California Can Save $10 Billion On A $9 Billion Loan
Obama's Middle East Policy Has Been A Complete Failure - Or Has It?
Precious Metals Blog
Silver Prices Today Remain Volatile - What To Expect Now
Live Markets
20Oct2016 Market Close: US Indexes End Flat After Choppy Session, Nigeria Slashes Oil Prices, Crude Prices Continue To Slip, Bullish Investors Not So Bullish Anymore
Amazon Books & More

.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Middle East / Africa
USA Government

Crowdfunding ....



Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved