The current 7 month rally on Wall Street is unusual for a number of reasons, first and foremost being the lack of statistical relevance.
The underlying fundementals for publicly traded companies generally provides a reality check that engenders a modicum of sanity to a roaring bull market.
Earnings and the P/E ratio(Price easnings ratio) historically give a focal point for evaluating a reasonable trading range for a companies stock.
This is not currently the case. Most companies have improved their balance sheets by reducing overhead, shedding employees, and reducing inventory.
These factors are admirable ,as corporate America attempts to weather the perfect storm of a heavy recession, an ultra left wing economic policy, real unemployment over 17%, and an arguably ineffective policy of squandered stimulus and corporate bail outs.
“Then why”, you might ask ,” is the market still going strong?”
This rally has no legs to keep it running.
Observations and interaction with the public has made me suspect that the retail public has not been the fuel for this rally.
This suspicion was recently confirmed by a report released by TrimTabs.
In the last 6 months only $ 2.5 billion has been placed into equity mutual funds, while almost 12 times that amount has gone into bond funds, an indication of conservative saving not speculative risks.
The U S investor has watched this rally rather being the fuel for its excess.
Who’s behind the speculative excess which has seen this unworthy market gain over 50% from its march lows, defying all underlying realities.
The answer has to be hedge funds. institutional speculators, the investment bankers with their TARP money and access to treasury funding as newly accredited banks.
These Go Go managers have a different perspective on the rally.
If indeed the rally turns out to be real, and they miss it, their jobs and reputations are toast.
If the rally fizzles and fails, they are risking someone else’s money.
The risk reward is in favor of maintaining the speculative push.
The danger in this type of speculation is extreme.
As they jumped into the rise, they will be willing to bail at the first sign of a negative reality.
We saw a free fall market last Fall.
Let unemployment continue to increase.
Let the next round of Prime Adjustable Rate mortgages begin to default.
Let the commercial real estate market crash due to the flood of small and medium sized companies being forced to close.
Let the perfect storm flood the boat.
You have heard the phrase , sink like a rock.
Let the little investor BEWARE.