Tuesday, April 8, 2008

Recovery? Shyeah, right!

Have you also been sent into hysterical giggling by the US markets' ability to rally at the sound of any news, good or bad?

Optimism, hope, faith when unexpected good news come out is endearing. But the current favorite rationale to buy, buy, buy when unexpected bad news come out, "it must mean we're near the bottom," is as intellectually satisfying as explaining price drops in "normal" markets as "profit taking." (Are price gains then the result of "loss taking"?)

Anyway, I digress. I read two weeks ago this nice little piece by John Authers in the FT. Now, I know two weeks is unbearably old for a blog, but there you go; it seems an appropriate snippet to have around the next time, the umpteenth time, that analysts come out to tell us that we must have touched bottom because stocks have gone up two days in a row (notice the prediction of a "bear market rally in the next few weeks"):

Perhaps the most convincing argument that we are not yet at the bottom is that so many people think that we are. The clamour to call an end to the crisis in recent weeks in itself shows that optimism has not been extinguished. History’s worst bear markets have been punctuated by many rallies when people thought the worst was over.

The collapse of the Dow Jones Industrial Average after 1929, and of the Nasdaq Composite after 2000, saw falls of about 80 per cent over three years. And yet both saw several “bear market rallies” when the index recovered by 20 per cent or more. Hope springs almost eternal.

In both cases the declines ended with the markets bumping along for a while, and then making advances that went unremarked at first. As Ian Harnett of Absolute Strategy puts it: “We’ll know we’ve hit the bottom when we look and see that share prices are a lot higher than they were a few months ago – we won’t know at the time.”

The case for a bear market rally in the next few weeks looks strong, provided the market can avoid more bad news on the credit front. But it looks hard to call a bottom. One sceptical analyst says: “The bottom will come when everyone at last gives up ever trying to find it.” That moment, unfortunately, is not yet in sight.


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