Friday, September 18, 2009

Has Wall Street rally gone too far?

Wall Street best rally in years stirs debate

Agence France-Presse

With Wall Street enjoying its best rally in decades, debate is heating up on whether the market has gone too far, too fast or is ready for a second wind.

Bulls and bears continue to slug it out: some say the economy is gathering steam and will keep the market on track; others argue this is still a "sucker rally" not supported by economic fundamentals.

In the week to Friday, the Dow Jones Industrial Average of blue chips advanced 2.24 percent to 9,820.20, its highest level in 11 months.

The technology-heavy Nasdaq composite lifted 2.5 percent to 2,132.82 while the broad-market Standard & Poor's 500 index vaulted 2.45 percent to 1,068.30.

The gains since lows in early March – 50 percent for the Dow, represent the best six-month rally for the blue-chip index since 1933, according to finance professor Mark Perry at the University of Michigan.

The other indexes have also soared over the past six months –
58 percent for the S&P and 68 percent for the Nasdaq – although all the indexes remain well below their all-time highs.

Bob Dickey at RBC Wealth Management said it is likely the market can return to levels before the collapse of Lehman Brothers and other events last year that led to a panic. That could push the Dow to around 11,000.

"A recent driver behind the market recovery could be the market performance itself, where after a more than 50 percent recovery, investors are being driven to invest the cash that has been woefully underperforming for the past six months," he said.

"This trend can last some time with the volume growing and the move accelerating as the fear of missing out continues to spread. And now we’re starting to hear more rumblings that the end of the recession may be at hand, and as this feeling grows, it could result in even more of a rush to buy stocks."

Barry Ritholtz of the research firm Fusion IQ said his analysis suggested that the rally has further to run.

"There's nothing in the technicals that we look at that tell us we're done," said Ritholtz.

"Based on history, which is no guarantee, we could be in the sixth or seventh inning of this rally, which means there still could be a ways to go."

Mike Shedlock at SitkaPacific Capital Management counters that investors hoping for a rebound have taken the market too far.

The economic rebound, he argues, is largely fueled by government spending and may not be sustainable.

"The fractional banking system is still broken, and so is the consumer," he said.

"Without either or both, every dollar the Federal Reserve attempts to print just replaces a dollar destroyed by bad debt.

"When the market realizes that the Fed can't create'll see that the S&P 500 is really trading at 20 times earnings that are not growing."

David Rosenberg at Gluskin Sheff & Associates is also skeptical about the rally.

"These rallies can often take you to heights that you can never imagine we would get to [but] they cannot be sustained without a durable organic economic expansion," he said.

"The problem is that the global economy in general, and the US economy in particular, is operating on so much medication that it is difficult to conduct an appropriate examination of the patient at the current time."

In the coming week, investors will scrutinize the statement from Federal Reserve, which holds a two-day meeting Tuesday and Wednesday. Although the Fed is unlikely to alter its near-zero interest rates, the document may offer clues about the central bank's plans in the coming months.

"There remains a great deal of uncertainty surrounding the speed and shape of recovery," said Pascal Gauthier, economist at TD Bank Financial.

"Growth has no doubt resumed, but the long-term path of US real GDP has been near-permanently impaired by the financial crisis."

In the coming week, the market also will react to reports on new and existing home sales, and orders for durable manufactured goods.

The strong move into stocks hurt the bond market. The yield on the 10-year treasury bond rose to 3.474 percent from 3.342 percent a week earlier and that on the 30-year bond increased to 4.231 percent from 4.175 percent. Bond yields and prices move in opposite directions.