Back in March 2008 (around that time), Bush said, “US is not in recession”.
And around that time, DOW had a rally in March starting from 11,800 and it goes all the way up 13,000 before it stops and reverse (in May). I remember the sentiments that many felt the economy is still healthy.
From May 2008 to July 2008, something happens. DOW reverse and break through critical support level. The rest is history as we know it. September marks the biggest drop that most of us have seen.
Yet, barely one year after this huge drop, lots of analysts are calling ‘green shoots’. All of a sudden, with the recent rally, lots of people is feeling bullish again.
It seems that this rally is so powerful that the problems associated with over leveraged has disappeared. People are once again able to pay off their mortgages. Or is that really so?
Apart from the banks ‘magical mark-to-sky-high’ assets, is the average Joe’s house selling at 2007 prices? Is the average Joe’s job secured or are there more people who needs assistance from the government, friends etc?
Are consumer spending more or are they tightening their spending?
These are the issues that forms the backdrop of my thought process.
At the same time, I know that there are lots of funds that are sitting on huge pile of cash. And these folks are edgy. They are trying to get back into the market. They need to stay invested.
But, can all these funds in the world push and sustain the market?
I bet not.
They can push it up again when the market dips. But, will the reality from macro economics catch up at some point? I bet it will.
Let’s take a look at the chart again. Following is a Weekly Chart for DOW.
1. From the chart, we can see how the rally in 2008 starts in March and ends in May.
2. The current rally that we are in now happens to to start in March. It is now May. And the volume has tapered off.
3. Will we see the beginning of a reversal? And more importantly, will we see the next big fall?
4. I don’t have the answer. But, I do know that the easy money for this rally is over. For any company to justify a higher stock price, they need to show it with their Financial Results. Even then, we will discount some of the reports because of their excellent ‘mark-up’ on assets.
5. Where does this lead us? Personally, I will be taking profits on the long positions, and at the same time start establishing shorts.
6. Be careful out there. Maybe, there is wisdom behind the phrase ‘Sell in May and go away’.