Friday, May 22, 2009

Will Stocks Come "Back to Reality?"

The day before a holiday weekend often sees lighter trading, and you don't want to read too much into any move, but I'm still looking at a few things today. The market has turned lower after futures rallied overnight and into this morning. There is a lot of talk about this rally sputtering out, and some of it is coming from some respected names:

-Yesterday I posted that David Rosenberg thought we will re-test our March lows. Click here to read that post.

-Today I read a brief story from Bloomberg with comments from Michael Steinhardt. Here's what he had to say:

Michael Steinhardt, whose hedge funds returned more than 20 percent a year
for almost three decades, said the steepest U.S. stock market rally since the
1930s will probably end.

“The economy is still a scary place,” Steinhardt said in a Bloomberg
Television interview. “My net feeling is that this rally doesn’t have all that
much more to go and the dangers out there remain consequential.”

“Can the stock market do well in a muddling period in the economy, where at
best it grows at a percent or two for a period of time? Maybe,” Steinhardt, 68,
said. “But it’s not a period where you see an effusive stock market.”

This goes back to the theory that this rally may sputter out due to lack of catalysts. What is going to move stocks higher? Most bulls say there is lots of cash on the sidelines waiting to buy the dips. That could be true to some extent, but in this crisis, people, as well as corporations are de-leveraging major amounts. More than usual in this type of cycle. I also have seen that some fund managers haven't performed well in this rally, which means they were still short, or at least weren't adding much to the long side. Will they jump in at lower prices now? Maybe.

This, along with the inflation vs deflation-should you buy gold debate, are the major talking points now. We know the big banks will survive, no matter how cloudy their outlooks may be. The government is content with flooding the market with new money from every which way. But how will this effect the market in the next couple of months?

The battle continues.

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