The Ultimate Sucker’s Rally: Record Breaking 50 Percent Stock Market Rally in 5 Months: Extreme Market Volatility Occurs in Deep Economic Recessions and Depressions. From 676 to 1002.

Incredible.  We have never seen a stock market rally like this in all the history for the S&P 500.  In no other time has the S&P index run up nearly 50 percent in the matter of 5 months.  Extreme market volatility is the ultimate sign of market distress.  Think for a minute and ask yourself if 26,000,000 unemployed and underemployed Americans warrants a 50 percent rally?  Ask yourself if $3 trillion in commercial real estate gearing up for implosion is reason for a massive jump in the stock market?  I assure you that it does not warrant the current rally but massive unrelenting blind optimism, the same blind optimism that led to the bubble, is back in fashion.

Now many people fail to realize that the best one day gains and the worst one day gains occur during periods of massive distress, not during bull markets.  Let us take a look at the worst and best 5 days on the Dow:

It is rather apparent that maximum fluctuation does not mean things are going well.  In fact, four of the five best days in the Dow occurred during the Great Depression and one of the five days occurred during our current massive recession.  The five worst days include three from the Great Depression and the 1987 stock market crash.  Let us first look at the current rally:

It took 17 months from the peak in 2007 to the “bottom” in March of 2009.  In that time frame, we lost 57 percent in the S&P 500.  A drop only rivaled by the Great Depression.  Yet our current rally is going on 5 months and is flirting with 50 percent.  Never have we seen this unrelenting drive up.  Even after the 1987 crash, it took some time to rally 50 percent and the economy was in much better shape at that time with lower unemployment:

How long did it take?  From October of 1987 to July of 1989.  Not exactly 5 months.  And this rally is happening with tepid earnings, massive unemployment, and the U.S. Treasury gearing up for Plan C to bailout the enormous commercial real estate bubble which will make the subprime debacle look like a walk in the empty subdivision park.  If we look at a 60 year chart of the S&P 500, we will not find a 50 percent rally in the span of 5 months:

The only other time that we saw such a massive rally was during the Great Depression when the market did bottom out.  But that bottom came after an approximately 90 percent drop in stock market value.  So many are betting that March was our Great Depression bottom.  But even then, with the mother of all economic contractions, we did not see a 50 percent rally in 5 months.  The absurd irony of this all is earnings are not good.  Sure, companies revise estimates to beat the street but overall they are not solid.  If you need any more evidence, just look at this chart:

It would be one thing if earnings were flying off the charts and stocks looked cheap.  That is not the case.  Make no mistake.  This is a hope filled rally not guided by the fundamentals.  It is a rally based on the psychology of “well things have to get better just because” and ignoring earnings, employment, and all other indicators.  It would be one thing if the market evened out.  That is understandable.  But to go up 50 percent in 5 months?  This reeks of a bubble.  At a certain point things will pull back and it will get ugly.  The recent GDP report which showed only a 1 percent contraction, better than expected, was only the case because of government spending. The consumer is spending less.  That is why consumers are being egged on to spend more with gimmicks like the cash for clunkers program.

The banks are only walking because of trillions in taxpayer bailouts.  The system is completely relying on the taxpayer crutch.  How long can this go for?  This market volatility with huge unemployment only signifies that this will be a slow recovery.  The market is rallying as if this will be a short and quick recovery.  I think the rally may go on because we are talking about the same infrastructure that made crappy homes double up in the matter of years so anything is possible.  But one thing is certain, if earnings don’t show up and employment doesn’t start picking up we are heading back down and in a fierce way.

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