Don’t Let the Recent Stock Rebound Fool You

Tuesday was positive in that major indices managed to reverse course during the last hour and finish higher on the day, with the exception of the NASDAQ. We like the ability of the market to extend the strong two-day rebound in stocks. It is clear that the market is trying to gauge the ability of President-elect Barack Obama to put in place his strategy to turn things around once he takes over on January 20. On Tuesday, we saw more evidence of his, as Obama set forth a new $800-billion rescue plan for credit

issuers to try to drive some optimism for consumers. We expect the proposed plan will be signed immediately after the transition of power.

 Yet, in reality, the investment climate remains harsh and filled with quicksand. A report by the Commerce Department pointed to a 0.5% contraction in the U.S. GDP in the third quarter, which will

set the country up for the recognition of a technical recession should the fourth quarter also see contraction as widely expected. The Paris-based Organization for Economic Cooperation and Development (OECD) predicts that the U.S. economy will shrink by 0.9% next year.

 But the United States is not the only country in limbo. The OECD also suggested that the current financial crisis could drive the world’s developed countries into the worst recession since the early 1980s. Estimates by the OECD predict that the GDP of the 30 major market democracies will contract by 0.4% in 2009.

 The reality is that you should not be fooled by the recent rebound, as we feel it is simply a “dead cat bounce” in a down-trending bear market. The fact that investor sentiment is extremely bearish indicates that a rally will not be sustainable and would be vulnerable to profit taking. So, be prudent and avoid chasing stocks higher after spikes.