04/09/2010 05:12 am ET | Updated May 25, 2011

Fabulous Bounce May Be a Sucker's Trap

Thank goodness for TV's bevy of financial experts. Following last Thursday's and Friday's tumultuous trading sessions in the stock market, we now know, based on their most recent comments and cogent analyses, that stock prices are headed higher, unless, of course, they happen to be headed lower.

On Thursday, the market got smashed, with the Dow tumbling 267 points as worries of sovereign debt defaults in Europe swelled. The following day, in response to the news of modest improvement on the jobs front -- notably a decline in January's unemployment rate to 9.7% from December's 10% -- the Dow kicked off the session on a slightly higher note.

Alas, that rise was short-lived as the market got a visit from Dr. Jekyll and Mr. Hyde, what with renewed jitters over those sovereign debt problems sending stock prices on a wild roller-coaster ride, resulting in the Dow switching from its morning plus to minus 167 in the late afternoon. Shortly thereafter, though, the recent Samson-like dollar weakened, which enabled the Dow -- in a fabulous rebound -- to erase its entire triple-digit loss and actually wrap up the day with a 10-point gain.

This latest outbreak of extreme volatility comes on the heels of a wicked loss about two weeks ago of 352 Dow points over three straight losing sessions.

In a chat over the weekend, online investment adviser Mark Leibovit served up what I thought was the most incisive quote in conveying a course of action in wake of the sharp and sudden up and down movements in stock prices, "This market is not for investors," he said, "Most market observers have tended to minimize the recent sell-offs, dubbing them as little more than minor corrections in an ongoing bull market. More than a few disagree, describing the declines as golden buying opportunities."

Some, though, view those "golden buying opportunities" as nothing more than fool's gold or a sucker's trap.

One of them is Leibovit, the head of VRTrader.Com. of Sedona, Ariz., who has been cited by Timer Digest Magazine as one of the best market timers around. His indicators, he notes, are still flashing a sell signal, indicating the short-term trend is down.

"The Friday rally could have been a phony rally," says Leibovit, who believes the Dow could shed another 1,000 points between now and mid-March, knocking the indicator down to about the 9,100 level from its current 10,012. Of particular concern, he says, is the negative nature of the trading volume (in other words, more market action on down volume than on up volume).

Among his major worries, the rallying dollar (meaning companies with large overseas operations will earn less money abroad), President Obama's anti-Wall Street sentiment, growing friction with China, which he notes is an ally to our enemies, and huge money printing, which Leibovitz views as a band-aid, not a solution.

"We're spending money like a drunken sailor, bailing out all the bad guys," he says. "It makes no sense."

His concluding remark: "This is a dangerous market... and you have to watch out because just maybe we're headed to new lows."

Long time bull and stock market guru Elaine Garzarelli, who had originally projected a 15% to 20% gain in stock prices this year, has recently shifted gears, recommending a hedged portfolio because of her expectation of a normal 4% to 7% correction. She now thinks a steeper decline is more likely, noting that Greece's debt problems have spread to other countries, such as Spain, Portugal and Italy.

Further, Garzarelli, who doles out investment advice to institutional clients through Garzarelli Capital, sees excess capacity around the globe and a possible deflationary environment developing. As of now, commodity prices are down about 8.5% from their recent highs, while unit labor costs are off 4.4%.

Indicative of her concern, she is now urging clients to consider a trio of inverse exchange-traded funds on any rallies. The three ETFs, which perform opposite the S&P 500, are ProShares Short S&P 500 (symbol SH), ProShares UltraShort S&P 500 (SDS) and UltraPro Short S&P 500 ProShares (SPXU).

Another institutional adviser, Bill Rhodes, a former Merrill Lynch strategist and now head of Boston-based Rhodes Analytics, also sounds some cautionary notes, in particular shrinking available liquidity around the world. "Once central bank and finance ministry liquidity is withdrawn," Rhodes observes, "we expect the markets to have difficulties, and we seem to have reached this position."

He also offers an intriguing observation. Cash in money-market mutual funds (a habitual hiding place for worried investors) is at a level that represents 26% of U.S. market capitalization, which is half its peak level of 52% in early March of 2009 and the bottom of the most recent bear market. He hastens to point oyt that 26% was also the peak level of the 2002-2003 bear market.

One final thought: Before going ga-ga over the moderate decline in January's unemployment rate, it's worth keeping in mind that job losses continued in January (20,000), the duration of unemployment is up (the mean is 30 weeks), the average weekly working hours are down (1.2%),, weekly payroll is down (1%) and there seems little hope that many of the the roughly 15.7 million Americans out of work will ever retrieve anything close to the 8.4 million jobs lost during the recession..

In other words, the battered jobs market is hardly looking like meaningful revitalization is just around the corner.

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