Bear trap rally or new bull?
Some optimists are cheering on a new bull market, but many analysts believe we are grappling with a series of "bear-trap" rallies. We saw six weeks of gains when the S&P shot up 28.5 percent from its 12-year closing low on March 9, only to see it drop again on April 17.
These kinds of "bear-trap" rallies are nothing new after a major market shock. The S&P rallied more than 20 percent on three occasions between 1930 and 1932 while the index plunged more than 300 percent during that period. We saw a similar though less damaging phenomena between 2000 and 2002, when the S&P rallied 15 percent or more on three occasions while the index dropped 40 percent overall in that time frame.
Most believe that until credit conditions improve we won't really see a sustained bull market. Companies are still finding it difficult to get credit or sell debt so they can operate their businesses or refinance maturing bonds. This financial block in the market will stall any recovery.
High-grade debt is still trading at junk bond levels, which means the market generally believes that bonds will default and bankruptcies will increase in 2009. Until that view turns around, don't expect to see the start of a bull market.
Seeking Alpha spoke with about two dozen gurus and most believe the bulls are not ready to run. Ambrose Evans-Pritchard is very pessimistic, "we have only just begun to see the mass lay-offs and hardship caused by this slump." He thinks politicians will act to save their skin and markets won't like what they do.
Louise Yamada said "many stocks and averages still remain below their downtrend lines." She goes on to say, "What you'd really like to see is the 200-day moving average turning up, and then some backing and filling." And she adds, "You can't fix in six months what's happened over six years."
George Soros doesn't believe you can count on a bull market rally until the economy turns around. He expects U.S. growth in 2010. He doesn't expect any recovery in the third or fourth quarter.
Laszlo Birinyl says "Buying stocks is like crossing Fifth Avenue when the light is red. You might make it, but the odds are not with you."
So generally most agree we'll be seeing a series of "bear-trap" rallies until the economy turns around and turn around is not expected until 2010. You may want to grab some good bargains near what you think is the bottom before the next rally, but be ready to hold those stocks for years because the bulls aren't expected to appear any time soon.
Lita Epstein has written more than 25 books, including Trading for Dummies and the Complete Idiot's Guide to Value Investing.