Great insights here from this weekends Barrons and Mike Santoli:
The idea of a bear-market overshoot phase — when the market goes beyond pricing in weakening economic conditions and turns to liquidation and panic — was first invoked here in July and most recently in October, when the Standard & Poor’s 500 was almost exactly at its current level.
The relentless climb of 30% since the March 9 low has recouped the ground ceded in the disorderly, deleveraging, Depression-recalling, government-is-clueless selloffs of the fall and early this year.
On the weekend ahead of the March 9 low, this column hesitantly suggested, “With the indexes stretched so far below their trend, a bounce or better could happen on any excuse, or none. Investors are so hostile to any and all government efforts, and so blind to real improvements in credit markets, that any less-than-terrible news would probably draw bids.”
This surge has been better, and more substantial, than a mere bounce. It has indeed been accompanied by plenty of less-than-terrible economic news. The rally has also outgained the initial phase of the 1938 rally I and others have cited repeatedly, due to its similarities with the 2008-2009 experience. If there remains relevance in the ’38 analogy — a powerful rally off historically depressed levels with the world still a mess — then we should be in for a sideways-to-down phase at minimum here.
There remains skepticism toward the upside fun, especially among professional investors who haven’t owned enough of what has led this move, have little company-level conviction in the fundamentals and seem to want a chance to buy them lower. This is a net positive.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.