Can 'Chewing Gum Rally' Stick?

Hey, maybe I need a new pair of eyeglasses. The last time I looked, the financial scene appeared unmistakably cloudy and ominous. Not so to Wall Street's bulls. They see plenty of sunshine and argue that the stormy market weather is over.

It's tough to belittle their view, at least as far as their vision of the stock market goes. In recent months, we've seen a euphoric market outburst, a far cry from March 9 when the Dow traded at its recent low of 6,547. At that time, pessimism ran rampant. No longer, though. The Dow is now hovering around 8,200, a nifty gain of about 26% in less than two-months. Further, April hardly turned out to be the cruelest month as the S&P 500 surged 9.4%, its best month in 9 years, leading some market experts to predict that still higher stock prices lie ahead.

Market gurus Abbey Cohen of Goldman Sachs and Steve Leuthold of the Grizzly Fund surely believe it. They're forecasting robust and respective 20% and 26% gains from current levels in the S&P 500. "We've hit a major market bottom," Leuthold says.

Still, there are a lot of non-believers, among them crack online investment adviser Mark Leibovit of VRTrader.com, headquartered in Sedona, Ariz. "The market is being held together with chewing gum and baling wire," he says. "It's a chewing gum rally that has little chance of sticking. It's like trying to put lipstick on a pig; that just doesn't work."

Much of the market's renewed enthusiasm stems from growing assertions -- which a fair number of influential media outlets seem to touting -- that:

-- The worst of our economic miseries is behind us, although job losses are likely to rise somewhat higher.

--President Obama is on the way to resolving our financial mess.

--The housing slump is near reversal.

--The tight credit reins should soon loosen.

--The banking crisis is almost over (although weekend buzz in Washington had it that the stress tests of the nation's 19 largest banks suggest they will require at least another $160 billion of financial assistance).

--Auto sales are hitting rock bottom.

It's anyone's guess whether this sunny scenario has any validity, but for now, at least, many investors are buying this sunshine, as evidenced by the market's growing ability to shrug off bad news.

Last week, we saw several noteworthy examples of this prowess. For example, on Wednesday -- prior to the market's opening -- news came out that first-quarter GDP tumbled at a much worse than expected 6.1% annual rate, the second biggest drop in 26 years. Expectations were widespread that the stock market would get pounded that day. Not so; the market didn't even blink as the Dow surged nearly 169 points.

The following day brought more bleak news, namely that Chrysler would file Chapter X1 bankruptcy proceedings. Again, the market displayed Samson-like strength as it traded higher through most of the session. Stock prices did turn somewhat lower very late in the session, but that drop largely reflected rumors -- which subsequently proved true -- that the government's release of the bank stress tests would be delayed. Still, the day's decline of 17 Dow points was relatively modest, considering the grim Chrysler tidings. On Friday, when news of the delays of the stress tests became official, the market rose again, with the Dow spurting 44 points.

It all raises the $64,000 question: Where does the market go from here? Former Merrill Lynch strategist Bill Rhodes, whose firm, Boston-based Rhodes Analytics, doles out market advice to institutional investors, views the rally, though a large one, as nothing more than a rally in the context of an ongoing bear market.
Still, he believes the rally, given the huge amount of cash on the sidelines -- $3.5 trillion in money-market mutual funds -- could easily extend another 10% 15% over the next few months.

Seen as yet another catalyst is the vigor of the recent rally, which makes it difficult for money managers -- the vast majority of whom have performed poorly over the past couple of years -- to simply sit on the fence and ignore it. They'll be forced to commit some funds to the market even if they're fearful and nervous, Rhodes says.

Still, Rhodes is far from gung-ho, telling me the market essentially is a mixed bag. Poor earnings expectations are one of his chief concerns. He also fears a further outbreak of the swine flu could depress economic activity, in turn derailing the potential for an extension of an exciting rally. The extent of further hikes in unemployment and entry into a traditional period of market weakness are yet other areas of concern.

Leibovit argues investors have become too euphoric. Taking note of some optimistic forecasts on CNBC of a rebound to a 10,000 Dow before year-end 2009, Leibovit observes "these are the very same idiots who were bullish at the top."

His indicators, he says, suggest we're still in a bear phase, leading him to project a pullback in the Dow to the 7,200-7,500 range between now and July. Noting that the Dow has rallied nearly 2,000 points in a relatively short time and has risen eight straight weeks without a correction, he questions the legitimacy of the market's advance.

Is the economy really showing signs of recovery?, he asks. Leibovit has his doubts, pointing to the sizable retreat in first-quarter economic activity, the fact that unemployment claims continue at a record pace and that earnings releases from companies are not that impressive.

"There's an old Wall Street saying: you sell in May and go away," Leibovit says. "Well, it's now May."

[e-mail]

Comments

[280park]

Don't get too pessimistic dan!

[desertman]

The truth is that banking profitability is not actually recovering, and neither is the economy. And that means that every stock market rally rests on shaky ground.

Foreclosures have become nearly as numerous as home sales. A recovery in the finance sector will remain a deception, a recovery in the economy will remain a false hope and a recovery in the stock market will remain a dangerous illusion.

Would America be any worse off if Paulson had simply told the truth?