The Stock Market’s Recently Cuddly Bear.
“NEW YORK (CNNMoney.com) — Wall Street rose Monday, pushing the major gauges to multi-month highs, as a better-than-expected housing market report intensified hopes that the economy is closer to stabilizing. . . Stocks are coming off a strong April, in which the S&P 500 spiked 9.4%, the Dow gained 7.3% and the Nasdaq jumped 12.3%. The S&P 500 and Dow have gained for seven of the past eight weeks; the Nasdaq has jumped eight weeks in a row.”
For anyone with money still in the market, this is exceptional news. But, is it time to sell, is it time to hold, or is it time to buy? The sentiment has turned in the past two months to the buy side, however, some see the opportunity as what they call a “trading rally” in a continuing bear market. And you can’t keep a good bear down, especially in the Spring. What many may soon do, I fear, is move dramatically to what they like to call the “sell side” to lock in the rather nice gains they’ve accumulated in the past two months (see chart, above left). If you bought the S&P or NASDAQ indexes, for example, in early March, a 25% gain in two months is almost nostalgic . . . Is this the land of milk and honey, or simply an oasis?
Well, It’s Not A Mirage. The gains are real, and certain economic news is improving. However, my vote is for oasis, and we have farther to march across inhospitable climes before emerging safely, both as an economy and as owners of equities.
Firstly, bear market rallies can be spectacular and this one has the earmarks. But this bear market, especially when fed by the drastic retrenchment and deleveraging of the consumer, cannot soon generate earnings among its components to justify even its present price-to-earnings ratio, and that measurement of health has not yet been consigned to the dust bin of history.
Secondly, employment continues to decline. True, the effects of the fiscal stimulus have just hit the streets, so we’ll see soon how effective they are. But the levels of unemployment and underemployment promise to stay high for a long time, particularly because of what I mentioned in “firstly.” Consumers represent 60-70% of GDP and they are, of all things, saving money and repaying debt. It’s chic. And it’s necessary. And even if it’s going to demonstrate the “paradox of thrift,” consumers know they need to recoup, even if government officials do not, 
and believe that TALF will provide credit card funding – and demand for credit – at levels that will restart the economy.
Yes, it is true that there are signs of improvement and we can rejoice in that. Purchasing equities on a dollar cost averaging program may make sense. And buy shares in an index fund; don’t bet on individual stocks. I’d move slowly, however, and keep your powder dry. I’m no financial planner or broker, so discuss it with your trusted adviser. Ask questions. Be wary.
I hate to do it, to rain on a parade. I don’t believe this decession (TM) we’re in will reach the levels of the Great Depression. Yet, I only “believe” that. Despite the nice run-up since March, I know of no way to accurately analyze today’s equity markets in this climate and conclude that I ought to hitch my financial wagon to a continuing rally. I’ve seen a few of these bears before, and I don’t like to feed them. They can get nasty:
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