The Rally Arrived – What Now ?

Early in March (I have still moved on, but my new blog is not up and running, so I post this short market comment here in my old blog), I briefly discussed the potential for a rally beginning at some time in March and the rally arrived more or less on schedule and - as usual - many including myself have had problem accepting the longevity of the rally already after a few days.

Some of the arguments behind the rally have been:

• A number of aggressive global government actions (almost manipulation of markets and news flows)


• A better than expected G20 outcome


• Banks earnings supported by Treasury and Markets (AIG?) operations


• Some de-acceleration in the weakness in economic data

For many hedge funds this have not been the best period as illustrated by HFRX Macro Fund index that in the rally period is down more than 4%.

There are a number of warning signals why this bear market rally very soon will begin to roll-over with some of the better arguments giving in the following links.

http://zerohedge.blogspot.com/2009/04/incredibly-shrinking-market-liquidity.html

http://www.bloomberg.com/apps/news?pid=20601087&sid=aRor2wiMrs9k&refer=home

With US Small Cap and Emerging markets up more than 35% from March 9 and S&P up more than 26% we have already come a long way in a short time. But in terms of time a bear market rally can easily last 2-3 months as illustrated on the first chart.

On the other hand, I have a crazy feeling that as we have been writing history over the last few years, it would not be a huge surprise to see a bear market rally of more than 50% as in the 1930's before we roll-over again later in the summer - that would leave a S&P target of 1000 within the next few months - surely an extreme outcome considering the expectations for S&P earnings for 2009 in the $ 30-50 range and the enormous economic challenges confronting the world economy. But it would surely be enough to convince everyone we are through the worst and laying the ideal foundation for the next leg down in the bear market.

The first real test for this crasy feeling will come this week following the expected strong Goldman Sachs Q1 earnings and the selling of GS stocks to get off the government support. By the way this is an interesting blog.

Finally the rally on Thursday happened on a misdirection day (Thursdays one week before option expiration) and full moon, so maybe there will be better buying opportunities during the week ... time will tell ... Good Luck