Insider

Three Reasons This Stock Market Rally Is False

Sunday, July 26, 2009, 3:59 PM
Enroll NowFor enrolled members only. Enroll or Sign in to read the full article.
Sunday, July 26, 2009

Executive Summary

  • Data is either good, murky, or unreliable.  The good data says we are not yet at the bottom.
  • Stock trading volumes are way, way down.
  • High frequency trading (HFT) harmfully obscures true market activity.
  • S&P 500 earnings indicate that stocks are still expensive.
  • The recent stock market advance is lacking a solid fundamental story to base itself on, it is running on hopes and fumes.

On a recent leg of a flight heading between Denver and Detroit, a kindly, middle-aged woman took the seat next to me and made small talk. As she hailed from Detroit, I had all sorts of questions for her. Did she know anybody who is out of work? How did the city 'feel' these days?  What had she noticed lately?

When she inquired as to my interest and I told her a little bit about my work, she asked for my prognosis. I said, "Not good, not yet; the base data is very weak." She immediately replied, "But the stock market has been going up. How do you explain that?"

She said this as if she had just played an undetected trump card; as though I was missing out some incredible secret. Given the power of the stock market to communicate to the masses (as exemplified by this exchange on the plane), and given how easily large, self-interested parties are able to manipulate and influence people, I consider the stock market to be among the least reliable of indicators.

So, understanding that all bull markets climb a wall of worry and that I could well be wrong, here are my three main reasons for discounting the messages implied by the recently rising stock market:

 

Enroll Now
Or Sign In with your enrolled account.
Endorsed Financial Adviser Endorsed Financial Adviser

Looking for a financial adviser who sees the world through a similar lens as we do? Free consultation available.

Learn More »
Read Our New Book "Prosper!"Read Our New Book

Prosper! is a "how to" guide for living well no matter what the future brings.

Learn More »

 

Related content

16 Comments on Three Reasons This Stock Market Rally Is False

Enroll now or Sign In to read all member comments.