Only a bear market rally in equities

By its very nature, the latest explosive advance in equities seems nothing more than a bear market rally, destined to be completely reversed. The outsized 303 point increase in the Dow on Friday, a 2.6% rise, is essentially a typical bear market phenomenon. In the current bear market, as well as in previous bear market periods, there were often such outsized spectacular increases. But the same can not be said of periods of cyclical stock market advances. For example,there were no such outsized up days in the cyclical advance between 2002 and 2007. In contrast, in the precipitous 38% 2000 through 2002 bear market plunge that preceeded that last cyclical advance, there were a number of such startlingly sharp daily increases. Indeed, in that particular 2000-2002 bear market there was even a rally that extended for six months, before being erased. But, other factors cuurently suggest that this bear market rally will not extend anywhere near that long.

Also, even with the sharp equity price increases last week, the stock market indices are still well within a longer-term downtrend that is virtually certain to persist. For example, the Friday close in the Dow at 11,732, up 3.6% for the week, remains under its 12,450 200-day moving average. Similarly the Nasdaq, at 2,414 at the Friday close, up 4.5% for the week, remains below its 200-day moving average level of 2,450. The S&P 500 index is similarly below its 200-day moving average. This year's previous bear market rally, in April and May, failed as the various equity indices touched or pierced their respective 200-day moving average levels. Whether that likely pattern actually repeats itself is of course unknown. But those 200-day moving average levels remain important resistance levels.

From the equity markets misplaced point of view, it sees some market positives reinforcing the current rally. Oil and other commodity prices are declining. The dollar is not only stabilizing, it appears to be strengthening. The Fed, as I suggested some time back, is retreating from its threatened firming. We are moving toward the Presidential campaign season, which has tended to be favorable for equities. The Administration and the Fed appear to be committed to solving the nations housing and related financial problems. There are some buybacks of the frozen auction rate securities. And some recent housing data provide at least a semblence of support for the wrongheaded notion that the housing recession is bottoming out. These developments do not adequately justify, nor will they be able to sustain the rally amidst a still deteriorating economy, rising unemployment, a credit crunch, an actually worsening housing picture, the financially stressed consumer and the beginnings of a global recession.

First, the so called market positives are not as equity-market favorable as equity market particpants believe they are. The decline in oil and other commodity prices is partly or largely a reflection of weakening demand amidst a devloping US and
global recession. That does not bode well for corporate profits here or abroad. And as corporate profit projections go, so goes equity market price expectations. The outlook for oil is also muddied by the military conflict between Russia and Georgia and the potential for flareups in other oil hotspots.

The strengthening dollar is in large part a reflection of a weakening of the Euro, the UK pound and the Yen. That reflects sluggish economic prospects for the economies of the EC, the UK and Japan and the growing liklihood of their eventual easing moves. That does not create bright prospects for the continued bouyancy of US exports and companies that depend on exports for sales and profits.

The Fed is maintaining its current Federal funds rate target because the US economy is weakening further, rather than rebounding as the Fed had mistakenly hoped, the financial and housing crisis persists and inflation concerns are moderating with the decline in commodity prices.

Though the US Treasury and Fed are committed to ameliorating the Financial crisis, there is no reason to believe the financial crisis is even close to running its course. With $300 billion in new capital raised, only a fraction of the perhaps $1 trillion to $2 trillion in aggregate losses, there is likely to be more financial pain ahead. MBIA's reported quarterly profit, after three quarters of losses, does not offset the report of a further major loss at Fannie Mae, with more mortgage-related and other losses to come throughout the financial coomunity.

The welcome buybacks of some auction rate money market instruments by some financial institutions from their customers merely moves the troubled assets to a different balance sheet. It does not solve the instruments illiquidity problem.

Initial claims for unemployment benefits increased to 455,000 in the latest week, up from 448,000 the week before. The four-week moving average reached the 400,000traditional recession threshold. Some improvement in home sales does not negate the continuing downward pressure on home prices from near record inventories of unsold homes, many vacant and/or in foreclosure. That is a sure precription for deepening declines in home prices and continuing housing distress.


Philip Braverman, President
Braverman Economic and Financial Consulting
One Hewitt Square #249
East Northport, New York 11731

E-mail address: philipbraverman@Gmail.com