Wednesday, March 11, 2009
Not much can capture the joy of a 6% rally like the Aquarius song from closing credits from the 40 Year Old Virgin. Thank goodness the bear is over, the financial crisis is over and we can buy them with both hands (that was sarcastic).
As has been mentioned many times the biggest up days occur in bear markets not bull markets. That does not preclude bear market rallies of all sizes from happening. At the beginning of the year I opined that we had a very good shot of a very big bear market rally and while the timing of that was wrong, big rallies, sometimes huge rallies, are part and parcel of bear markets (see 1932 and 1933).
The decline in the stock market from the 2007 peak has been incredibly fast and incredibly severe. While I have no idea whether yesterday will be the start of something really big or a one day wonder I do believe we will have a huge rally at some point that makes people start to feel good again followed by another big decline that scares the hell out the same people who felt good on the way up.
Forget the emotion, look at a Stock Trader's Almanac (or the max DJIA chart on Yahoo Finance) to see the extent to which feel good rallies followed by more tears repeats in every cycle including the Great Depression (repeated for emphasis). For those worried that this is the great depression 2.0 keep in mind a huge sucker's rally has nothing to do with fundamentals, they are short-ish term events driven by emotion.
Instead of more tears if things play out the way I think (up a lot followed by another big run down) it makes sense to remember how these things often work so you won't be surprised in case the next great bull market is not upon us. Some folks might want to think about reducing their equity exposure after a big run up either for tactical reasons or for the I-give-up reasons cited yesterday.