Are We In The Midst of a Bear Market Rally?

The markets have rallied tremendously from the lows that were seen in early March.

The DJIA (Dow Jones Industrial Average), which traded as low as 6,547 in early March, recently sailed past the 9,500 mark. The DJIA rallied more than 3,000 points in just five short months.

The Nasdaq, which traded down to around 1,270 in early March, recently topped the 2,000 point mark. This represents an astonishing near 800 point gain in less than half a year.

The S&P 500, which traded under 700 points in early March, recently topped the 1,030 mark.

An incredible rally to be sure - one of the biggest six month rallies that we are likely ever to see in our lifetimes.

However, the question now becomes - is this a powerful "bear market rally", or the beginning of a sustained bull market?

Many investors clearly figure that the worst news is now behind us, and that this is the beginning of a bull market.

However, according to this recent article on Bloomberg.com, many hedge fund managers are betting against the rally, determined that we are in fact in the last stages of a bear market rally.

Some very successful fund companies, including Tudor Investment Corp. (Paul Tudor Jones) and Brevan Howard Asset Management LLP, are not buying into the hype, and expect that the US economy will have its share of troubles moving forward.

Bears point to a number of issues for the US economy moving forward, including:

-continued sky-high deficits that will erode the value of the dollar
-continued high unemployment rates
-lack of consumer confidence
-diminishing impact of financial stimulus

Bears also point out that there is a historical precedent for this "bear market rally" devolving into another pullback - the bear market rally of late '29 - early '30.

In 1929, the markets crashed, signaling the beginning of the "Great Depression".

After hitting a high of nearly 400 points in September of 1929, the DJIA plunged over 180 points in just a few short months.

After reaching an intraday low of 195.35 on November 13th, 1929, the markets staged a furious comeback, gaining almost 50% in just 5 months.

This lulled many investors into a false sense of security, as the prevailing opinion at the time was that the crash of 1929 was just a bump in the road.

However, the five month rally turned out to be nothing more than a bear market rally, and the worst pain was yet to come.

By October of 1930, all of the gains had evaporated.

By May of 1932, the DJIA was trading at under 50 points, a fraction of the November 1929 lows.

Now, there are a number of differences between now and 1930, but there are also many similarities as well.

There are at least as many similarities to justify people pausing and taking some precautions.

Maybe the markets will continue to soar over the upcoming months and years, but there seems to be a pretty strong case for a sustained pullback. If you believe that history is the best teacher, then you should be at least a bit cautious at this point.

Filed under: The Economic Meltdown