Bull Market vs Bear Market Rally.
May 09, 2009
– Comments (23)
OK, I'm gonna try to give my best explanation of why I think this is a Bear Market Rally and Not A Bull Market.
I'll start with the arguments for a Bull Market.
1) The fundamentals have improved. Bulls will submit that the market is being led upward by the same companies that led them down, the financial institutions. They'll mention that those companies have turned the corner so fast that many are now trading near their 52 week highs.
2) A 2 month trend in the market. It's hard to argue with momentum.
3) A slight increase in institutional investment. The guys that are getting paid to make money are starting to buy into the rally.
4) Increasingly good government reports. The outlook from the government is looking better.
5) The VIX (the fear index) is in about the middle of it's range and dropping.
Now my arguments...
1) The banks are all paper tigers! If I apply the current accounting rules to my own household, My home is worth at least what I paid for it, not what somebody will actually buy it for today. I make money because I have debt. I really don't have much debt, but if I did, I could report the drop in interest rates as if it were income. If I don't like the way my income looks on paper, I can simply adjust my fiscal year in a way to make the bad things disappear. I can avoid putting my liabilities into my budget all together if I want too, which makes my bank account look much better. The downside on all of this is that reality really hasn't changed, and when I run out of money I'm forced to report this stuff, that's OK though, because rather than loan my money out, I'm hoarding cash to avoid an Enron type situation for a little while at least.
2) Back when cable TV was relatively new, my cable company gave me free HBO for 2 months. I took this as a sign that they knew that I liked to watch movies a lot, but didn't want to pay for the experience, and this free channel thing had legs. I was wrong.
3) This one, I can't argue. I don't know if they are taking advantage of a Bear rally or Bull market, but I do know that they still have a huge amount of cash on the sidelines, and I'm taking that as a sign that they don't know what they are doing yet either.
4) Lies. Every unemployment report is getting revised upward months later. Winks and nods are given to corporations to lie on their quarterly reports as well. The CEO of BAC was forced by the government to lie to his shareholders to prevent the truth from effecting the market. (A felony)
5) My favorite one. Most novices take the meaning of "fear index" too literally. It is a measure of fear, but it's a measure of fear of speculation and not a fear of the market. There is fear in both Bull and Bear markets. I look at the VIX a lot because I trade options. I like to measure the volatility of the options that I'm trading vs the volatility of the best of the S&P. Sometimes this allows me to take advantage of market sentiment to find poorly priced option prices. I can tell you with almost certainty that the VIX will hit 20, but you will probably see the the biggest spike you're ever going see in your lifetime shortly after.
I'd love to hear comments or arguments.
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