Monday, March 16, 2009

Buy, Buy, Buy into This Sucker's Rally

The market has turned around. No doubt about it. Here's my rule of thumb: if bad news is good news, or no news is good news, and the market goes up, it's a bull market; on the other hand, if good news is bad news or no/neutral news is bad news and the market goes down, it's bear market.

So Citi came out with some non-news about what their revenue was, for the first 2/3 of the quarter, not considering potential write-downs. The market went on for a 10% surge. It's a bull market.

People are hopeful, by our genetic, evolutionary bias. We want to believe. Now that the earnings season is over, we want to believe the next quarter will be better. We look for evidence supporting the belief. We found one. We latch on to it. Then greed urges us to get in before the crowd. Plus the short squeeze. Plus early tax returns who by definition overpaid.

Oh, G20 meeting produced nothing besides some empty words, which is entirely as expected. But Asia markets rallied overnight anyway. Yup, it's a bull market.

So, enjoy the ride.

How long will it last? Could be as short as yesterday, or it could last until the next earnings season, but no more. There is no reason to believe 09Q1's earnings will show any sign of revival in any particular sector (look at housing, retail, and unemployment). CDS levels on financials (1 year -- all financials are inverted, implying the primary concern is short-term survival) remain at highly stressed levels (300~3000 bps range, meaning highly stressed to imminent default). Even CDS on 5Y US credit has been hovering around 100 bps, although it did come down to the 80's by Friday. Oh, did I mention the ticking time bomb of Central Eastern Europe double wammy of currency crisis and debt crisis that will make the 1998 Asian crisis look like a playground boo-boo? No? Glad I didn't. Why rain on your parade when you could google "Hungary inflaction protest" yourself?

Such sucker's rallies have occurred more than once throughout this crisis. I don't advocate fighting the market, even if it's a sucker's market. A freight train full of suckers carries the same weight as one full of geniuses.

Just be ready to jump out of it any moment.

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