The Rally Continues

While I expect the bear market rally to continue for a short while longer there is no evidence that I can find whatsoever that we have reached a final bottom in this once of a lifetime collapse in equities and the economy. Here’s what you have to remember about bear market rallies; they happen incredibly quickly and the resulting move higher can be 10-20% in just a few days to 3-4 weeks. So, if you don’t get on board quickly you will find yourself buying back into stocks just as the bear market is about to kick back in…and that first move back down is typically a very scary, several hundred point, one day drop that signals the bears are back in charge.

There are two primary reasons for these lightning fast bear market rallies. One: when investors fear that the “train is leaving the station” and that a new bull market could possibly be getting underway, nervous investors jump back in as quickly as possible. It’s that fear of missing the bottom that can bring $100 billion + in liquidity back into the stock market in such a hurry. Two: because we live in the information age these rallies become global much faster than ever before, which means that seemingly great news is happening all over the world, and all at once. This causes a worldwide stampede into equities and before you know it the so-called experts on CNBC, Fox Business, USA Today, the Wall Street Journal, etc., are frothing at the mouth to announce that they were the first to call the bottom and the beginning of a new bull market. We’ve seen them do this on the way down at 13,000….then at 10,500…then at 9000….8000…well, you get the point. They’ve been wrong all the way down and they will be wrong again this time. For once, it would be refreshing for these “gurus” to be called on the carpet for all of the money they have cost investors with their horrendous advice. To date, US investors have lost over $5 trillion in the stock market alone (not counting real estate and business losses), and if they hadn’t listened to their brokers, they certainly wouldn’t be nearly as broke.

VRA subscribers have gains of 200% plus since last September, including more than 25% just this past week. If you're not a subscriber you are missing one of the best trading markets of our lifetime, and I fully expect the opportunities to only get better from here. I'm using double and triple short (and long) index ETF's that allow us to move in and out of the market on trades that last 1-2 weeks. In addition, my gold and silver recommendations have produced gains of 40% in under 4 months.    

At this point the easy money has definitely been made in the financial stocks, and while they may have some room left to run, I would look to sell any remaining financials that you may own once this rally shows signs of fizzling out. Trust me when I tell you that the financials and banking stocks have some very tough roads ahead, and outside of Goldman Sachs and Morgan Stanley, there aren’t many companies in this group I would feel safe owning in the long run. The government, under once thought to be wonder-boy Treasury Secretary Tim Geithner, will be announcing their latest plan to remove toxic assets from the banks book in the next couple of weeks and this could give us a bit of a sustained move higher. However, you can bet that the short sellers, VRA included, will be waiting for this exact moment to short our select financials heavily (and the entire market) once this plan is announced. Remember, “buy the rumor and sell the news”!

Ohhhh…did you catch the downgrade of Buffets Company Berkshire Hathaway this past week? The ratings agencies now rate his debt AA+ versus the AAA rating he had enjoyed for so long. This is the first downgrade, but it certainly won’t be the last. Buffet has huge holdings in (among others) Wells Fargo, American Express, and of course even larger exposure in the insurance industry (Geico, etc)…not to mention his derivatives bets in favor of the stock market going higher. Buffet has lost over half of his (and investors) net worth in about 8 months and years from now we may view the bankruptcy of Berkshire Hathaway as the final bottom in this bear market. Maybe not a likely scenario but based on where his debt is already trading in the CDS market, not all that much of a stretch either.

Kip Herriage

Editor, VRA