Last week’s rally ran into brick wall yesterday as worry about the upcoming earnings season surfaced.
While the major indexes closed to the downside, a recovery rally during the last couple of hours reduced the damage considerably.
The current question is as to whether the “earnings bar” has been set low enough. In other words, worse reports than the already low expectations could bring this current bear market rebound to an end in a hurry. Slightly better results, along with improved future guidance, will undoubtedly support the bulls and may provide more fuel to the upside based on the (erroneous) view that the economy has turned the corner and happy days are here again.
While I don’t always agree with Bill Fleckenstein’s view, he had this to say in “A bear rally in bull’s clothing?”
There is also another possible reason for the celebration: the copious amounts of money being created from thin air by the world’s central banks (not least of which being the early stages of quantitative easing, the conversion of government debt into money). Money printing plus imagination are potent forces that can’t solve our problems but can affect the stock market in such a way as to make it appear that the worst has passed.
It must be remembered that some of the best rallies occur in bear markets. For instance, in the first half of 1930, the market jumped 40% — twice what Bubblevision defines as a bull market — and it certainly didn’t end very well. (Part of the reason for that big rally was a belief that the recession, which became the Great Depression, was already over.)
I have touched on the fact before that not only sudden but also the most violent rallies occur in bear markets. Personally, until proven wrong, I can’t see that reckless monetary expansion over 30 years along with the destruction of assets and employment of historic proportions will be resolved with government stimulation packages and an ephemeral bear market.