A Rented Rally

Rough week, eh? Anyone would think the markets had developed an acute sense of multiple personality disorder the way they are behaving. One moment it’s Pollyanna, whispering sweet nothings… then the eyes glaze over and the voice drops a few octaves…something more sinister has crept in.

Even the intra-day activity was difficult to pin down. After a huge spike following their earnings announcement on Wednesday morning, Wells Fargo slipped 7% for the day, “a classic ‘outside day’ reversal,” as Eric Fry pointed out in Thursday’s issue. Indeed, the Dow Jones Industrial Average itself collapsed 165 points, top to bottom, on Wednesday, with a triple digit haircut in the last couple of hours alone.

Falling Down the Wells

That’s not the kind of “confidence” you want to see confirming a “recovery.”

But markets don’t move in straight lines, dear reader…neither up nor down. After all, a sucker’s rally is nothing without the suckers. Ergo, Mr. Market must lure in as many victims as he can with promises of better sunsets and fatter cigars for all. For his part, the sucker is ready and willing to believe anything that confirms his delusion. He was ready to buy a house he couldn’t afford…ready to believe stocks would always go up…ready to believe he could always get something for nothing. And if he’ll believe all that, he’ll surely believe a jobless recovery with contracting earnings and ballooning deficits is all but a sure thing.

But he’s living on borrowed time, as Dan Amoss explains.

“A rational, disciplined investor would be fearful about buying today, after prices have been jacked up by an unprecedented seven-month rally,” warns Dan, the mind behind the Strategic Short Report. “Nearly every economic and corporate development over the past few months has been translated into a reason to buy stocks. But underneath the elation over Dow 10,000 lies the palpable feeling that this rally is to be ‘rented,’ not ‘owned.’”

Every day the rally persists, in other words, the probability that it will perform a “black swan dive” off the cliff increases. Stocks are rapidly approaching – and in some cases have eclipsed – valuations that presuppose a robust, multi-year recovery is well underway. The S&P 500 index sells for over 19x FALLING earnings…earnings that are unlikely to improve in any meaningful, sustainable way.

Companies, meanwhile, are slashing employees like a bad horror flick. Initial jobless applications rose by 11,000 to 531,000 in the week ended October 17, according to the Labor Department. Economists fret that people working fewer hours and earning less money might tighten their belts a bit going into the Christmas season. They worry about what might happen to their consumer economy when the consumers economize.

We could take a guess…but we wouldn’t want to spoil the ending. Besides, thoughtful, reasonable individuals have already read the book. They have a pretty good idea how it all shakes out…and they’re running for the hills.

The Daily Reckoning