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Current run-up still Looks and Smells like Bear Rally

Whatever the may be the past 19 months from April have thrown at investors, they can’t complain that they haven’t been treated to some rewarding market rallies.

There had been six at last count ever since the bull-run ended in August 2007, some of the very powerful and impressive.

The most recent started more than 3 weeks ago and shows few signs of relenting, having already hoisted the standard Straits Times Index by 23 %. Its strength and resilience has added further more extra juice to the ongoing debate- “Is this to end with the start of a fresh bull-run, or just another bear rally luring in traders to t far another off-the-cliff plunge? After all there has been abundance of those as well from the time of August 2007.

Going by preceding run-ups in the past 19 months, the current run-up may yet turn out to be another dead cat leap. But the current run-up has been so authoritative that some investors are willing to give it the benefit of the disbelief and compromise that it may indeed be the start of a fresh bull run.

The theory gives some help. A rally has normally been classified as a Bull Run once stock prices flow by more than 20 %. Nonetheless other market observers, no suspicion stung by the brutal market swings during this economic crisis, prolong to doubt if what we are seeing now qualifies as a bullish market.

Factual, some of the rallies in the past 18 months have been short and aggressive. Three lasted hardly more than a week each before being snuffed out by fresh suspicions in the wobbly global financial system. But it is the initial of these bear rallies – the one that was in progress on Aug 17, 2007, and ended on Oct 11 that year – that has given rise to so many worries about this run-up.

The era of 2007 rally sent global markets rocketing to record highs – the STI surged 25 % in those few months – but it turned out to be a fake dawn.

Traders had been so much mesmerized by the United States central bank’s swift action in cutting interest rates and China’s noticeable willingness to open the flood-gates by allowing its citizens to invest overseas that they faultily believed the worst of the stock market carnage was over.

But the ruthless reality began to drop in. China put such investment plans on grasp and global investment banks such as UBS and Citigroup were made obligatory to write down billions of dollars on their portfolios as credit markets froze.This sent the STI dropping 13 % in November 2007.

What had caused stock prices to commence their ascent in the present rally was positive remarks by bosses from major US lenders such as Citigroup, JPMorgan Chase and Bank of America that business for the first two months had been enhanced than expected. Shares enjoyed an additional boost when short-sellers jumbled to buy back stock they had borrowed.

Investors were also heartened by efforts made by the US Congress to lean on accountants to slow down the “marked-to-market” rules, which were broadly blamed for eroding the capital base of banks.These rules enforced them to write down the value of their portfolios each time a fire sale took place on an analogous asset.

The most recent run-up got an additional boost from US Treasury Secretary Tim Geithner’s plan to clean up the ragged balance sheets of troubled US lenders by joining with the private sector to buy deadly assets. The sharper market observers considered that they have seen similar kind of movie before.

A rally was triggered in March last year by extensive relief that investment bank Bear Stearns had been sold to JPMorgan in a save engineered by the US Federal Reserve.

That rally ended in an additional push of course, but the rescue initially led many investors into believing that the Fed had drawn a line under the crisis with the Bear Stearns bailout.

That made the shock and disappointment even greater when Lehman Brothers – a far larger investment bank – was allowed to fail six months later.

For many observers, Geithner’s suggestion is merely a far bigger version of the Bear Stearns rescue efforts as he tries to wash out the toxins from the banks without inflicting the pain of nationalization upon them.

While such financial stimulus may trigger a bounce in the global economy in the next six months, it may turn out to be a “head fake”, as a rise in consumer prices next year blunts the effectiveness of the motivational measures.

A check on the price activities on Wall Street during the Great Depression also throws up an interesting example. Hardly a month after the great market crash in October 1929, stock prices blast up over 20 % within a fortnight.

The run-up lured investors into one of the biggest suckers’ rallies in the past, as the bulls charged on for another five months before breaking up in the wake of a sharp slimming down of the US economy.

Chronological comparisons with 1929 may not mean that the market strength in the past two weeks is now another bear rally. But it does emphasize that until the pressing structural problems in the global financial system are ironed out; each market run-up will still look and smell like a bear rally.

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