The markets have floated since the Santa Claus rally began early last week. The volume has been extremely light and this does give the market a slight upside bias. Remember the old saying, never short a dull market. Well, this market has been very dull if you go by the current volume. Many stocks have screamed to new highs for the year such as Apple Computer(Nasdaq:AAPL), U.S. Steel(NYSE:X), and Simon Property Group(NYSE:SPG). This is the Santa Claus rally that everyone looks forward to every year. The one problem this year is the market has rebounded over fifty percent for the year already. What is left in the tank?
The last time we had a bounce of this nature was in 2003. At that time the market rallied from a March pivot low into the end of December. Will history repeat again so soon? Back then many believed it was the start of the new bull market. The Federal Reserve Bank Chairman Alan Greenspan had lowered the Fed funds rate(overnight lending rate from the Federal Reserve to the large banks) to 1.00 percent. This caused a boom in commodities and inflationary stocks. It also made capital easy to borrow. This in return caused the great credit and housing bubble of 2007.
What is one to expect now? The current Federal Reserve Bank Chairman Ben Bernanke has lowered rates to 0-0.25 percent. This type of policy in rates is usually a bubble maker, however, with 10 percent unemployment who is really worrying about inflation. It seems like the U.S. Treasury and the Federal Reserve Bank are trying to defend against deflation. Remember Japan has been in a deflationary tailspin since 1988. This was when the Nikkei index was trading as high as 39,000. The index now trades at 10,000 and has been much lower last year. The point here is that deflationary economies are hard to fix. The U.S. looks to be attempting a print and spend methodology. Print more money and spend everything that you print.
It is important to remember the one factor that helped the Japanese citizens was their high level of savings and their low debt. The U.S. consumer is really just the opposite. Most Americans have high debt and very low savings. This is a reason for caution. Many talking heads are saying the worst is behind us and the new bull is in effect. Similar words were spoken in 1930 after a 50 percent rebound as well. Remember what the famous writer Mark Twain said, “history does not repeat exactly, however, it does often rhyme.”
Nicholas Santiago
www.InTheMoneyStocks.com
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