Dead Cat Bounce

by Peter Leeds on August 27th, 2015

 

When there is excessive stock market volatility (like we are seeing now), it always points to one of two things.  Either it is a market top, or a market bottom.

The volatility comes from investors looking for fair value, and represents a wide diversion of investor opinions of appropriate levels.
 
Do not put too much stake in the one or two day rally we've seen on the heels of massive sell-offs.  While a case can be made for either higher prices to come, or further downside, most of the data suggests we are heading lower still.
 
In fact, this latest "relief rally" was partially predicated, as they always are, on investors thinking they are getting good value on shares which are comparatively lower than they used to be, in the short term.  
In addition, much of the buying momentum stems from short positions being closed out.  When investors bet on stocks to fall, they need to buy back into those positions as soon as the underlying shares start climbing, or else risk significant losses.
 
Sadly, none of the concerns overhanging the markets have been addressed or fixed.  Money has been loaned out to developing nations in U.S. dollars, and recent American dollar strength along with weakening currencies overseas means those are some pretty bad, unpayable IOU's.
 
The Chinese markets were actually down this morning, until the government imposed a bunch of artificial regulations which drove their index up 5% in the last hours of trading.  This looks like strength, but it was manipulation.
 
Now our own Federal Reserve is the wildcard, with their possible "raising rates" game.  In my opinion, they won't raise rates, and if they do it will completely derail the economy.  
 
More likely they release more easy money by way of Quantitative easing 4... which will be called by another name so they don't look as useless as they have been up until this point.  That will give the markets a temporary artificial boost.
 
No matter what happens, we are entering a global recession.  That makes recent market strength a temporary dead cat bounce.  Do not think we are out of the woods because of a few good days on the markets.
 
In fact, we're not even close to reaching our recent heights.
 
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