It was another low-volume/uneventful day yesterday...until about 2:30, when the stock market rallied strongly over the last hour and half. When you combine the 12 point gain in the S&P 500 this morning with the 20 point gain the futures are indicating this morning, you put the S&P less than 2% from its February all-time highs. With the Federal Reserve providing a safety net, it is very tough to think that the stock market can see a substantial decline from here. We agree that a severe decline is very unlikely, but there is no question that the action in the market is eerily reminiscent of what took place in 2000 and 2007. In both of those years...a record breaking, but overvalued stock market saw a correction...that was followed by a retest of the old highs in the August/September time-frame. Then it rolled over and began a savage bear market.
Of course, there are differences this time (like there always are). The initial “correction” was MUCH deeper this time around. However, as we mentioned above, the biggest difference is that the Fed is already providing liquidity to the market place. Even though they have throttled-back on this stimulus significantly over the past two months, they still remain ready and willing to provide “whatever it takes” if/when it is needed. Therefore, the odds that we’ll see another debilitating bear market begin over the next few months are very low.
However, this does not mean that we cannot have a meaningful pull-back...or even a full-blown correction of 10% (or a bit more) over the coming weeks. As we have highlighted ad nauseam recently, there are plenty of signs of froth in the market place...with last week’s action in Kodak leading the way. However, there are other signals in other stocks...even from the ...
