Bear Market Rally Over?

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by Lou Scatigna

The historic stock market rally since early March looks like it is beginning to run out of steam. For the last two weeks the market has really gone nowhere and looks like it wants to roll over and start the next phase of the big bear market. The market has come a long way since it's March 6 lows and either needs to digest these gains before moving higher, or more likely in my opinion will begin a more sinister decline than we saw earlier this year.

Although the financial media and The White House are touting "green shoots" of economic recovery, there really is no tangible signs that the economic contraction is over. The job market is still declining albeit at a slower rate. The housing market is still a mess with only foreclosed homes selling and they are selling at distressed prices pulling the rest of the market down with it. The bankrupt auto industry shows no sign of improvement and the fallout of GM and Chrysler's bankrupcy filings will not be known for months but it can't be good.

A new and big impediment to the economy and markets recovery is the rapid rise in Treasury bond yields. Since January the 10 year U.S. Treasury Note yield has risen from 2.5% to almost 4%. This rapid rise is a slap in the face of the Federal Reserve which has been buying up U.S. Treasurys with the goal of keeping market rates low. Many mortgage interest rates are tied to the 10 Year Note so any rise will further deter home buying. As a matter of fact the 30 year fixed mortgage rates have risen from 4.75% to 5.5% just ove the last few weeks. Why are rates rising in the U.S. Treasury market? There are two reason rates are rising, the first is that the U.S. budget deficit for this year alone is over $1 trillion dollars and Obama's budget calls for a mind blowing $1.8 trillion next year. Secondly, the Fed has to be the buyer of last resort as foreigners boycott our bond auctions. The Fed essentially prints the money used to buy the bonds and is "monetizing" the U.S. deficit. The expansion of the money supply will result in a falling dollar, rising bond yields and ultimatley inflation.

Those who held their stock market positions through the crash should ask themselves the following question: "How did I feel on March 6th when my stock portfolio was down over 50%? If I was given the opportunity to sell it 40% higher than it was then would I do it?" Well if the anwer is yes than you are lucky to have this opportunity to do just that. The stock market will eventually relent to the bond market's decline and follow it down. The big fear I have is that Act 2 will be the big one and those who were seduced into this bear market rally will be severely hurt. Use this rally to lighten up your stock market exposure before it's too late.