Tuesday, March 10, 2009

Coming Soon -- Another "Bear Market Sucker’s Rally"

The global economic meltdown is teaching me new terms.

First was "Dead Cat Bounce"

Then came "V shaped" and "U shaped" and "L shaped" recessions.

Now we learn to watch out for a market rally aka "bear market sucker’s rally."

From the Roubini news alert:

Can we rule out another bear market rally some time in 2009?

No, we cannot rule out another bear market sucker’s rally in 2009, most likely in Q2 or Q3. The drivers of this rally will be the improvement in second derivatives of economic growth and activity in U.S. and China that the policy stimulus will provide on a temporary basis. Given the severity of macro, household, financial firms and corporate imbalances in the U.S. and around the world this Q2 or Q3 sucker’s market rally will fizzle out later in the year like the previous 5 ones in the last 12 months.

What are the downside risks to these bearish predictions for U.S. and global equities?

On the downside there is at least a third probability of an L-shaped global near depression rather than the mere current severe U-shaped recession. If a near depression were to take hold globally a 40% to 50% further fall in U.S. and global equities from current levels could not be ruled out. But in this L-shaped near depression the last thing one would have to worry about would be stock markets as more severe issues would have to be addressed.

What are the upside risks to these bearish predictions for U.S. and global equities?

On the upside, we have an aggressive policy stimulus in the U.S. and other countries that might lead to a faster sustained economic and financial markets recovery that expected here. The bullish argument for a non-bear market and early persistent recovery of global equities is based on a better than expected recovery of the U.S. and global economy.

There you have it.

Will Rogers had it right when he said "The way to make money in the stock market is to buy a stock. Then, when it goes up, sell it. If it's not going to go up, don't buy it!"

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