Are you buying this rally?

Posted by Ray on July 30, 2009 under Economy, Markets | Be the First to Comment

I believe the market is very overbought right now and the data does not support this massive run in the indexes. Below is the YTD chart of the S&P 500 with various technical indicators. I think you have to judge the earnings, economic data (or lack there of) and technical analysis.

I do not believe this rally is sustainable and is a head fake. Not only does this rally feel over extended it is also largely based on the weak dollar. Below is the YTP chart of the DXY vs. the S&P 500. What is funny is that CNBC and others on shows like Fast Money actually think a cheaper dollar is good for the US. They acknowledge the movement between equities and the dollar strength, but totally ignore its impact on the country long-term. Commoditization of our equity markets is not good and is a problem.

It is up to you whether you want to jump into this market or not, but I am a seller into this rally. I do think it will continue to move higher with much more volatility, but the correction is inevitable even though no one knows when it will come. My guess is in the next 30 days we will see a sell off that will start small and intensify into the fall.

All is not rosy in the world, contrary to popular belief, and the global economy is starting its second leg down. We typically have these unusual moves before the markets begin to struggle and sell off. A few months and wads of cash cannot fix things over night and that is what people will realize in the near future, especially since real estate, residential and commercial, are still a mess.

As I watch the talking heads now they keep saying this is the best run since the 1930′s. Shouldn’t that be telling you something? Tread carefully in this market and if you feel like you missed the run, do not worry you will get a better price in the near future.

Disclaimer – I am short the dollar/Euro pair.