Financial Markets Seem Silly

There is no surprise that the market had its biggest one-day gain in 75 years after its biggest one-week loss in history. Today may feel good, but we have seen this all before.

The market was up huge today.  It may be up huge tomorrow.

The government is putting still more money into the system to try to take the Great Depression off the table.  I believe that they will be successful.  But, the global economy is getting weaker, earnings estimates are falling, financials are failing.

Last week saw forced selling.  Stocks were pushed down so quickly by people forced to sell, that when these people disappeared, stocks bounced.  Tomorrow, we may see forced buying from people trying to get in to what they see as a new bull market.

But, the market is ultimately going to reflect the fundamentals.  And, the market is still trying to price in a down economy.  Only after the economy has teatered along the bottom for a while can we begin to see a new bull market.

It took 3 1/2 years during the Great Depression for the economy to go from peak to trough (1929 to 1933).  After the internet bubble, it took more than two (2000 to 2002).  Economic cycles are getting faster, but this one is related to housing and consumer credit.  The market needs to trail the realities of those sectors, which will not turn quickly.  So, especially in this case, I don't think we are going from our October 2007 peak to trough in only a year.

Celebrate today.  But, take it with a grain of salt.   Don't put yourself in a position where you won't be able to tolerate a retest of Friday's lows.  It is very likely we will see more blood.

Ari Socolow
Ari Socolow: Ari Socolow is the Chief Economist and Editor-in-Chief at BestCashCow. He is particularly interested in issues relating to financial literacy and bank transparency. Since co-founding this website in 2005, Ari has been frequently cited in the media as an expert on local and national savings accounts, CD products, mortgage and loan products and credit card rewards products.

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