Herd Mentality And The Market

The top reasons people are saying we have hit bottom:

1. Stocks are grossly undervalued
2. Housing is showing signs of improvement
3. Commodities are rallying
4. Massive government stimulis
5. Dovish commentary from Fed

This rally is going to be a very fun wild ride to the upside. People are euphoric! Just a few short weeks ago most market sentiment was sidingly bearish. Now, with a sudden 22 percent rally, market sentiment is decidedly bullish. When this thing starts to fizzle though in the next 3-6 months, watch out. The bear market rally in the midst of the great depression went for a good 50 percent. The market we live in today is full of black box electronic trading strategies, swing traders, and hedge funds. This market rally will way over react to the upside. It is a great time to buy, but watch out once we top out. Allow me to debunct the bull market pundits.

1. Stocks are undervalued...These companies are not undervalued just because you can buy a slushy for the same price as a citi group stock. Current earnings per share put the SPX at 600 or 650, not it's current 812 mark. Forward earnings aren't looking too hot either. Financial institutions are estimated to reduce earnings estimates by as much as 60 percent aggregated over the next few quarters alone.

2. Housing is showing signs of improvement...Housing prices gapped down in price and therefore enticed investors to buy in. The forclosures are still rising and unemployment is still rising steadily, the extra housing supply will keep coming. We are still in a housing bubble as the average salary can't afford a home for another 30 percent price decline. Sure, you can lower interest rates to 3 percent to make houses more affordable, but then we are recreating another bubble.

3. Commodities are rallying...Commodities are rallying because of inflation. We buy oil with the U.S. Dollar. When we spend ridiculous amounts of money to "spendulate" the economy into submission, we create an inflationary environment. Oil supplies remain relatively consistent with demand. Oil therefore isn't rallying based on fundamental economic numbers...just the weakness in the dollar.

4. Massive government stimulis...I have to admit, trillions and trillions and trillions and trillions of dollars created out of thin air and given away doesn't escape notice or market inflection. In my view however, this is just another bubble we are creating that will eventually pop. The generation that lived through the depression had to learn to scrape and save and repair their shoes. We just borrow more money. This free money is not free. We will eventually have to pay the piper and face the reality that huge amounts of debt is never going to substitute for a decent savings account. Plus, it took Uncle Sam over a year and a half to throw the money that is supposed to turn the economy on it's heels. Tough to stop a rolling semi truck once it gets going.

5. Dovish Commentary From Fed...Weren't they long the market end of 07 and 08?