Special Market Report: Bulls Gone Rabid

There is something strange and disturbing happening on Wall Street. It is Midsummer 2009. The disturbance is not a meteor, zombies, a North Korean missile attack, a rebellion, or anything that can be seen to the naked eye. It isin the stock market.

The bulls have gone rabid.

Of course I speak metaphorically. The bulls don't have rabies, and even if they did, they're not on Wall Street (possibly excepting the above one). However, the stock traders have certainly caught the bull-market euphoria once again.

Below is a one-year chart of the S&P 500 index:



See the big jump to the right? That is the recent two-week surge in the stock market, which has completely broken the suspected head-and-shoulders chart pattern associated with topping out. Yesterday the Dow Jones Industrial Average closed at 9069, at a 8-month high, and this has furthur inflamed the bullish calls coming out recently, the most rabid of which is Larry Kudlow's call for "Dow 14000" (for reference he's been saying on every rally so far that the bear market was over).

Below is a chart showing the 200-day moving average. The S&P touched it twice before this surge, so for technical analysts this can be seen as a positive sign.


No one can deny, though, that the recent less than 10% drop is over, and the market is now up more than 10% since the low hit at approximately 870 (we're now at 975 or so). I have called the top for the past 5 months in the rally, and have been wrong each time, so I will not embarass myself again now.

I am at a loss to explain the sudden "rabid runup", but some have suggested that the trading activities of Goldman Sachs could be responsible, and with all the money they have to work with, it could be responsible for at least some of the runup. But I will tell two things:

1. Bulls (or anyone else) infected with rabies will rampage for a while, but will die at the end. The same thing will happen to the "rabid runup".
2. I reiterate my saying in the previous report that green shoots will not grow in toxic dirt. The dirt (i.e. the actual facts) is still toxic.

With that said, I do predict an economic recovery for the US, but is more in line with Roubini than Bernanke. If nothing catastrophic happens between now and then, the economy should begin to recover in Q4 2009 or Q1 2010. I happen to believe that the Q3 recovery is too early of a scenario, although the decline in GDP may slow then. The stock traders and investors by and large are expecting this, and if this fails to materialize, it will not bode well for stock prices.

As I said last time, barring any crash or sudden reversal of a trend, the next report will be in August.