Profiting in the Most Well-known “Fake” Market Rally Ever

by Michael Lombardi, CFP, MBA

My good friend Bob Appel (who I believe is one of the best market analysts alive today) says that there are five reasons why the current stock market rally is really a “fake” rally in the confines of a long-term bear market. Here are his five reasons:

  • Corporate balance sheets have improved, but only in relation to the mess those same balance sheets were in last year.
  • Corporate earnings are improving, but only at the cost of massive layoffs across the U.S. Many jobs have permanently disappeared, which will severely impair consumer spending (which is 70% of the U.S. economy).
  • Corporate inventories are at record lows and need to be
    replenished (which is a good thing), but inventories will only go up if consumer demand picks up and stays up. Consumer demand
    remains very weak.
  • The various economic stimulus programs of the government have delivered came at a very high cost: massive debt, a declining U.S. dollar, and possibly higher taxes.
  • The current stock market lacks trading volume and resembles more a “speculative blow-off” than the beginning of a new long-term bull market.

To the above, I’d like to add two additional thoughts:

Eventually, the massive debt of the U.S., the declining value of the U.S. dollar against other world currencies, and coming inflation will spur higher interest rates. In well-developed countries like Canada, where the central bank believes the recession is already over, higher interest rates are a closer reality than analysts can understand. Can the U.S. economy tolerate higher interest rates? The answer is no.

The best guidance I can give my readers is the following: Yes, we all know that this is a stock market rally in the confines of a major bear market. But why not ride the wave now while it lasts and enjoy the stock market profits while you can?

Michael’s Personal Notes:

While the American economy gets lean, American consumers are getting fatter around their waistlines. Back from a recent trip to Florida, I was surprised to see so many food chains offering bargain-priced meals in an effort to bring customers into restaurants during the recession. One fast food chain is advertising the $5.00 “complete meal.” Another popular sit-down chain is offering a $6.95 entree and dessert deal. Looking at the recent financial statements of these retail food chains, they are all doing reasonably well in this economy. I wish I could say the same for the health of their customers.

Where the Market Stands:

Is this most well-publicized “fake” stock market advance ever? I’ve never read so many comparisons of this stock market rally to the rally that followed the crash of 1929. Yes, as the stock market continues to climb the proverbial “wall of worry,” most retail investors miss the advance. The Dow Jones Industrial Average is up six percent since the beginning of the year. The most disturbing part of this rally has been the lack of volume. Healthy stock market rallies are usually accompanied by rising trading volume…this one isn’t. While valuations might be getting out of whack again, I don’t fight the trend. And that trend is clearly up for now.

What He Said:

“Despite all my ‘yelling’ and ‘screaming’ about gold, I believe only a few of my readers and a small fraction of the general public have taken a position in gold. Why? Because gold’s not trendy…buying condominiums for investment is! If you are an investor, you need to seriously look at investing in gold stocks, because gold bullion prices will likely continue to rise.” Michael Lombardi in PROFIT CONFIDENTIAL, September, 21, 2005. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments.