Officially, since their nadir on March 9, US stock markets have seen their biggest rally since 1933 over the past month. Here's the scorecard for the major US markets and several others since the Dow hit bottom on March 9:
Please note that the hightlighted (in bold) markets are those which have clawed back into the black for the year. The rest are still below the levels at which they started the year even after the huge rally of the past month.
The one-month moves on all these markets are impressive indeed. They are, that is, until one takes a few other things into account. For example, for these markets to regain the (all time high) levels most of them enjoyed less than eighteen months ago, most of them would have had to more than DOUBLE from their early March lows. There is also the small matter of the "impetus" which has been used to underpin these markets by governments around the world. Official interest rates have been all but abolished. Mega TRILLIONS of stimulus and support money has been pledged and spent. Government deficits have expanded at a pace which has no historical precedent. In short, a global bear market rally has been created, its proportions being commensurate with the paper resources expended to produce it.
In ALL of these stock markets, the huge falls of 2008 which accelerated into the second week of March this year did NOT stampede most people out of the stock market. Examination of retirement portfolios and other types of mass investment vehicles everywhere have shown that the majority of people have NOT sold out of their stock investments. That is why the huge writedowns in global "wealth" have been reported. Most people still hold their stocks, conditioned to the conviction that "in the long run - stocks always go up". With the notable exception of the Japanese market (now being emulated by the Chinese market), that has been true ever since the 1980s.
Despite the harrowing losses on paper portfolios suffered over the past year and a half, most people still think it is true. They still hold most or all of their paper investments. And, since March 9, they have seen their decision to hold "vindicated" by the biggest global stock market rally in more than 75 years. This is DEADLY dangerous. When rallies as explosive as this one take place in a bear market, they vindicate in most people's minds the decision they made not to sell when the market was falling away all around them. All of a sudden, the investment portfolio or retirement account is looking much healthier. All the dark fears they were harbouring are pushed further into the background with each point the market they were invested in goes up.
It's not really a loss unless you actually sell, after all. And if they had sold, they would have missed the biggest rally in three-quarters of a century. That is the attitude which has gradually hardened over the past month of global stock market rallies. Nobody wanted to believe that the "money" was gone for good. Now, with this rally, hopes are being born that the people who have watched their portfolios crumble since late 2007 might actually get most or ALL of it back again. And when Bernanke, Geithner and Summers (among others) start talking about the "recession" being over by September, as all have done in recent days with Mr Obama cheerleading in the background, this attitude hardens even further.
No REAL long-term bear market ever reaches its final bottom without a mass panic sell-off. This only happens when the vast majority of those holding stocks become convinced that the market is NEVER going to recover, so they give up and sell out. That has NOT happened over the course of this global bear market so far. The majority of the selling last year and early this year was "deleveraging", mostly done by people who held positions on margin and who could not meet the margin calls which proliferated as the markets fell.
There is one constant in ALL markets. The higher a market goes and the longer it seems that it can do nothing but keep going up forever, the more pronounced it is. Again, with the exception of Japan, global stock markets were on an upward advance (with notable stalls, like October 1987) for 25 years, from 1982 to 2007. The bloodbath of 2000-2002 did not alter most people's attitude towards the stock market. Even though they did not make any money there over most of the period, they were still getting richer on the real estate bubble. The market bloodbath of 2007 until mid March this year has sorely tested this attitude, but it has not broken it. This is true even though ALL paper markets have been in free fall. The last to succumb, the futures market for commodities, keeled over last July. But even this has not, so far, induced most people to sell their paper assets.
What has happened is the alternative, Gold, has been pushed up to the $US 1000 level twice since March 2008 - with another big rally in July as commodities prices peaked. But the urge to "diversify" out of paper assets has been blunted over the past month with this huge global stock market rally. Given the size of the rally, and the amount of "fuel" fed in behind it, Gold has done extremely well to have only now marginally fallen below the $US 900 level.
Because there has not yet been a traumatic and voluntary (as opposed to forced) sell-off in world stock markets, it is as certain as anything which has not yet happened can be that they have further - probably MUCH further - to fall. Because this rally has "vindicated" the decision NOT to sell in the eyes of the vast majority of individual stock holders, they will from now on hold on with even more tenacity. That means that the bottom, when it finally comes, will be even lower than it would have been in the absence of this rally. Sadly, that's how bear markets work, and how they have always worked.
The catalyst for "alternative" means of investment, like the precious metals, will come at the point when the current stock market rally runs out of steam and is SEEN to have run out of steam. Many commentators are now calling for Gold to exceed its $US 1000 ceiling this year. The higher this stock market rally goes, the sharper the downturn when it finally runs out of fuel. And when that happens, the impetus UNDER the Gold price is all but certain to be irresistible - no matter how much Gold the IMF threatens to sell or how many government shills prattle about the "end" of the recession.
(Chart appears here in original analysis)
A new low was hit on the chart when spot future Gold closed in New York at $US 705 on November 13 last year. This pushed the chart two "Xs" below the $US 715 support level established in late October and equalled early in November. Then came the first big turnaround - and upturn on the chart - of November 14. The region between $US 700-720 firmed as SOLID support for Gold. That support "zone" was emphatically confirmed as Gold rose by just over $US 110 between November 13 and November 28 last year.
On February 20, as you know, Gold made it all the way back to its previous all time highs. But it did NOT break through the $US 1000 barrier. Since then, Gold has retreated to just below the $Us 900 level in three moves down. What is now beginning to be traced out on this chart is a gigantic "reverse" head and shoulders formation. The trading range between $US 900 and $US 1000 is now firm. With $US Gold back below $US 900 in the aftermath of the G-20 Summit, we are again below the bottom of the trading range although still in touch with it.
We began the table below in 2007 and have extended it into 2009, even though Gold in all four currencies in the table remain well above their 2006 highs. The all time highs for Gold which occurred in 2008 have remained intact in US Dollars and in Yen.
But in terms of the Euro and especially the Aussie Dollar, the situation is very different. Gold hit new all time highs in both currencies on January 30 with situation being duplicated by Gold in terms of MANY other currencies. On February 20, those highs were taken out when Gold hit $US 1000. With Gold now more than $US 100 below that level, and with several currencies having risen against the US Dollar since then, Gold is off substantially. But as before, the only thing we still await is for that $US 1000 level to be broken through on the upside.
| |||||||||||||||||||||||||||||||||||||||||||||||||