Overbought?

Yesterday, I wrote “Some think this is a secular bull – a view I am not discussing in this post.  Others see this as a cyclical bull-market a.k.a bear market rally  I would put Jeremy Grantham in this category.  I would also put myself here, although I do think short-covering has made this rally dangerously over-bought.”  Apparently, I am not the only one who thinks this market is way over the top here.  David Rosenberg has issued a missive saying similar things with some robust statistical support.

Going back to 1950, not once has the S&P 500 managed to surge more than 40% in advance of the recession ending. I think mostly everyone would agree that while the recession may be in its final stages, it is not over just yet.

On average, the S&P 500 rallies 20% from the lows to the end of the recession. I realize that the comeback is that we hit an egregious low, but we always do in bear markets. I am just talking about what the ‘norm’ is, in terms of rallies that typify the late stage of the recession in the real economy. So, it would not be untoward to see a 20% correction just to mean revert this rally from the lows, assuming that this is all about hopes of the recession coming to an end. Yes, that would be 750-plus. As an aside, Sam Stovall from Standard & Poor’s stated in the Sunday NYT that 800 on the S&P index is an inevitable retest point.

Again, back to 1950, by the time the S&P 500 was up 42% from a bear market low (as is now the case), not only was the economy not in recession at that point, but it was typically nine months into recovery mode. So even if the consensus is correct that the recession ends by September, the market right now is trading where it would ordinarily be in May 2010. What are we going to do for an encore?

Clearly, this is a case of caveat emptor.