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Tuesday, August 25, 2009 12:49 PM

Buying into the Rally, Hook, Line, and Sinker

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Belief that the worst is behind is now nearly universal. Mickey Mouse, aka Ben Bernanke, even has himself fooled. He was reappointed today as grand wizard (see Bernanke's Self-Promotional Reappointment Campaign A Stunning Success) and in general people are feeling pretty good about it.

Indeed Consumer sentiment improves more than expected.

Consumer sentiment rose more than expected in August and expectations hit the highest level since the recession began, indications that Americans' pessimism about the economy may be lifting.

The New York-based Conference Board said Tuesday its Consumer Confidence index rose to 54.1 from an upwardly revised 47.4 in July. Economists surveyed by Thomson Reuters had expected a slight increase to 47.5.

Still, the index is well below 90, the minimum level associated with a healthy economy. Anything above 100 signals strong growth.

Sal Guatieri, an economist at BMO Capital Markets, said the jump in the expectations index meant consumers likely will spend more in the months ahead.

"It won't be a smooth ride, but with consumer confidence now tracking higher, the groundwork for a sustainable recovery appears to be in place," he wrote in a note to clients.
I beg to differ with Guatieri. Throwing money at problems, just as Japan did, is not grounds for a strong recovery.

Few seem to understand the secular change in consumer attitudes and what a secular bear market in stocks really looks like.

Bumpy Ride To Bottom

Inquiring minds are reading Markets In for a Bumpy Ride to a Bottom.
The current conviction running rampant is that kick-starting the animal spirits is the appropriate abracadabra because the full faith in the government and the belief that the market always came back has always worked -- eventually. The problem is, eventually is a long time.

The symbiotic relationship between government and Wall Street is being bought by the financial markets -- literally. It’s not just that financial markets believe in the government -- they want to believe, they have to believe. They have had little alternative since essentially both were part of the problem.

Main Street is not so sanguine. A new downturn and a failure of green shoots to magically manifest into redwoods could send a severe psychological shiver. Question: if crisis has been completely stemmed and we're on the road to recovery and the government has used all its bullets, a failure of the party line and a second dip should cause the power of the government to be questioned. Disillusionment could cause what might be a second dip in otherwise less virulent great recessions to become more pronounced. At best it could translate into a long period of bumping along the bottom. At best it could accelerate a downturn with a hope-filled V going from a W to a Y.

Few of the technical analysts on the Street today have ever traded through a secular bear market. Nor have many of their indicators. This is the first secular bear market where technical tools and indicators have been democratized to a large degree by the computer and the Internet. There's a lot of belief being placed in a lot of indicators that have not proven themselves in a secular bear market. In my experience, the thing with most technical indicators is that while they may have worked well many times, they can fail you when you need them the most -- Anthill Indicators. Moreover, most technical indicators are descriptive, not predictive. Cycles and the price patterns they trace out in their rhythmic motions speak to the mood of investors' emotions: the music of the market rises and falls, undulates and seethes with the mentality of the mob, the sentiment of the crowd.

Last week the Daily Sentiment Index hit a new high of 88% bulls. The last time this level was hit was in October 2007. Why was there so much bullishness then... the crisis was over? The belief in the Fed and containment was widely embraced. The Street bought it hook, line and sinker. Literally.
Once again, market participants have bought into wizardry, hook line and sinker as noted in Belief In Wizards Runs Deep.

Few think a W or L shaped recession is possible. The S&P PE is an insane 145. Yes, that is backward looking. But what forward earnings does everyone expect given consumer attitudes towards consumption have changed for good and boomers heading into retirement are scared to death?

Whatever those earnings expectations are, disappointments are likely. Either earnings will miss targets, or the stock market will sink anyway because the earnings and then some have long been priced in. However, that is tomorrow's business. Today's business is about buying into the rally hook line and sinker, just as the charlatan wizards have hoped.

Mike "Mish" Shedlock
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