Before painting a cautious picture on the stock market rally since the March 9 lows, it’s important to point out that investors are getting ahead of themselves again as the global economy and corporate earnings remain stuck in the basement in 2009.

Since stocks hit an all-time high in October 2007 investors have been massacred buying into bear market rallies disguised as a bottom; over the last 18 months equities have staged three false rallies, including the current up-crash. The S&P 500 Index is now 20% above its March low.

The reason why most investors, including professionals, continue to incorrectly call a bear market bottom is because this crisis is unlike anything we’ve experienced in more than 75 years; a credit-induced bear market attacks financial assets leaving investors with very few legitimate safe-havens to safeguard their wealth. It’s much easier to make money in an inflationary environment as non-financial assets surge and the dollar typically tanks.



Earlier this month I suggested it was a good time to start buying stocks again following a peak-to-trough crash exceeding 60% for the S&P 500 Index and the MSCI World Index on March 9. My reasoning was that if you can handle volatility over the next five years then equities represented good value when they were 20% lower almost three weeks ago.

Yet I also warned that investors should not lunge after stocks even at those depressed levels because the case for domestic consumption, more bank failures and soaring unemployment did not bode well for a new bull market. I still feel that way.

I bought stocks after March 9 and plan to average my way back into the stock market over the next 6-12 months as the market does eventually hit a secular bottom. But I’ve got a big problem accepting this is a new bull market because credit spreads have largely refused to narrow since March 9, gold prices remain elevated and the banking system is still a long way from stabilizing. Also, commercial real estate loans are now heading sour adding to more credit troubles on already battered bank balance sheets.

In short, you can’t underestimate a credit bear market. This is not a regular bear market. Global governments have injected trillions of dollars into the financial system since August 2007 and yet the world economy is still contracting sharply. Policy makers have thus far failed.

To be sure, stocks are also rallying because the scope of bad economic news has moderated this month with manufacturing data, housing sales and durable goods all showing surprising strength. However, I view this series of data as a blip and nothing more.

Meanwhile, in the 1930s the Dow did manage to post five counter-trend rallies in the context of a bear market before collapsing again. This occurred in 1930 (+48%), three times in 1931 (+23.4%, +27.6% and +35%) and finally in 1932 (+24.6%). By June 1941, the Dow had finally bottomed and thereafter gained a cumulative 350% until crashing again in 1937. But June 1932 did mark the bear market low. That historical low was achieved after 32 months; this credit bear market is thus far into its 20th month and, judging by its severity and the mind-blowing destruction of credit, it will also last just as long, if not longer, than the 1929-1932 bear market.