Haim,
Since many have turned to the bullish camp, heres something to just keep it in perspective.
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1. The S&P 500's P/E ratio is still at 27 and its dividend yield remains near its all time low at a mere 1.6%. Who would have ever thought that the Fed would be cutting interest rates with the S&P 500 P/E ratio actually higher than it was when Alan Greenspan gave his famous "irrational exuberance" speech? Valuations are still incredibly rich and there never was a washout in the S&P 500's big cap stocks that would have eased the pressure. The biggest risk is if the economy (assuming it already hasn't) slips into a recession and earnings really decline...an average dividend yield of 1.6% is not going to attract many investors waiting for earnings to pick up again.
2. Alan Greenspan has proven himself fallible. The legend of Greenspan has finally been debunked. If this is what his fans call a good job (global economic turmoil) I would hate to see whathappens if he really slips up. The Bulls love him for now because he has turned on the printing presses but if bundles of fiat money were able to solve financial problems, history would not be filled with so many booms and busts. Only a few months ago, Greenspan was pushingfor a rate hike. One thing is for sure, no matter how bad of an idea a rate cut is, no one (except Bears and they don't count) will complain.
3. Too much optimism and euphoria for a bottom. Analysts that were bullish back in July at the top are still bullish at the alleged bottom in October. This doesn't make a lot of sense and there wasn't that much capitulation besides a few flip-floppers like Ralph Acampora who is probably bullish again anyway. A more solid bottom would have shown more skepticism over the rally instead of the head first plunge into it.
4. Corporate profits will not be helped much by Fed cuts. Corporate profit gains have been declining since the spring even as the Fed was considering hiking rates. The Fed rate cuts may keep profits from falling off a cliff, but they will not be able to match the very high expectations already built into stock prices.
5. Dollar is getting hammered. U.S. dollar index has dropped about 10% in just the past couple of months which is going to greatly reduce the attractiveness of U.S. assets.
6. Inflation will start to pick up. The strong U.S. dollar kept imports cheap which helped keep inflation down. A decline in U.S. economic activity would have helped ease inflation by cooling of labor pressures. In addition, monetary growth is going to explode (it was already pretty darn strong) as the Fed pumps money like crazy to meet its new Fed Funds target of 5%.
7. The inter-meeting move was another act of desperation by the Fed.
First an assisted bail out of Long-Term Capital and now an emergency
rate cut. Clearly something is very wrong behind the scenes and I
suppose that we will eventually find out exactly what it is. Instead
of a sigh of relief, the Bulls should be chewing on their hooves
wondering what danger the Fed sees to make them make such a sudden
move instead of waiting until November.
8. Technically the market remains weak. The Dow is still a few hundred points below its 200 although it did managed to bounce above its 50 DMA on Thursday. Breadth remains terrible with a huge divergence occurring in just the past couple of weeks. On Thursday, the Dow closed at 8,299 but the NYSE's breadth is actually weaker than it was on October 1st when the Dow was trading at 7,632.
9. Panic moves up or down are not to be trusted. S&P 500 futures moved 50 points higher in just a few minutes sparking heavy short covering. During the bull market, big panic spikes down were always quickly reversed within a few days. During the current bear market the reverse will likely be true.
10. Since the Bears were destroyed on Thursday, the market lost a great source of future support. With such a huge and sudden move, the Bears had to rush to cover their short position and they were likely a fair sized source of the market's big gain on Thursday. Now that their positions have been trashed,it sets up a greater possibility that when the market falls again it will fall a lot harder.
Perhaps the Bulls can get the Dow up to the 200 DMA at 8,550 and maybe get the VIX back down into the 20s. As I see it, the Bulls and Bears are getting a tremendous gift. The Bulls have a chance to get out at decent prices while the Bears are being given the chance to make a safer short now that the market has been wrung out. The big danger is that both Bullsand Bears will believe that the rally and rate cuts signal a new Bull market.
fiendbear.com
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If one looks at their full report, for the short-term they have turned neutral, so I believe there is some objectivity to their report.
seeya
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