I bought stocks for the first time since the advent of the global credit crisis twenty months ago in early March. Though this was not a major allocation to my portfolio, I suggested that investors with at least a five-year time horizon could begin dollar-averaging into the market at these lower levels.

Since hitting another intermittent low on March 9 the S&P 500 Index has now rallied a cumulative 20%.

Of course, this is not the first time stocks have attempted to place a bear market bottom since late 2007. We’ve already had two such intermittent lows – the last one in late November – and both ended badly for bottom-fishers.



I don’t subscribe to the view that we’re in a new bull market. The Wall Street Journal and other financial newspapers and many analysts now coin this rally a bull market because by definition stocks have gained 20% or more over this period. Once again, mainstream investors have underestimated the depth and magnitude of a credit deflation – an event nobody alive has ever witnessed.

To be sure, and to credit the bludgeoned bulls, several economic indicators have improved lately, including ISM manufacturing data, consumer confidence, retail sales and durable goods. In my view, however, these statistics are coming off very depressed levels and I think we’re just in a dead-cat bounce – nothing more.

I’ve got seven strong reasons why I’m not convinced we’re in a bull market:

• The VIX Index or the CBOE Volatility Index, which acts as a fear gauge, remains above 40. I’d be more constructive about stocks and taking market risk if this index fell below 38.50 – an important support level. The fact it remains elevated is a testament to ongoing nervousness among market participants;

• Investment grade corporate credit spreads are still way too high. High quality spreads remain north of four hundred basis points (4%); historically, investment grade spreads have averaged about 130 basis points or 1.3% above Treasury yields, according to PIMCO. This price action bothers me the most because it suggests the safest credits aren’t rallying and, instead, remain near their mid-September crash peak;

• REITs are not rallying along with the stock market. Fear is rising in the real estate sector with commercial loans next on the chopping block for banks. Some of the biggest REITs, like General Growth Properties (NYSE-GGP) are struggling to raise financing. REITs are down 33% this year and have posted only a modest 10% rally since March 9;

• The Baltic Dry Index, which measures bulk cargo rates for shipping commodities, skyrocketed off its lows last fall and then peaked a few weeks ago. This index is now down 32% since peaking in March – indicating that trade flows are deteriorating sharply;

• Gold. Despite a decline of $118 an ounce off its highs, you’d expect gold prices to be much lower if the bulls were really in control. If the reflation theme is back or the re-emergence of higher inflation accompanied by the acceleration of bank credit and money printing, then why hasn’t gold rallied along with stocks? This is a bad sign that deflation, not inflation, is currently in control of the markets. Rising stocks mean rising corporate earnings and therefore cost-push inflation. Yet this is not what gold is telling us now;

• Small-cap stocks are lagging since mid-March – an anomaly in the context of bull market rallies. If stocks were truly putting in a bottom then smaller stocks would generally lead the market; small stocks have indeed gained over 23% since the March 9 low but are essentially flat since March 18 and now lagging the broader market over the last several trading sessions;

• The U.S. dollar should be declining much faster as stocks rally. If the bear market was truly over then more dollars would be sold to increase risk and leverage bets in global markets. But that’s not really happening. Despite the dollar’s big correction two weeks ago, it has modestly recovered, which signals the Fed has not entirely created enough liquidity to flood the system with cash. This is a deflationary sign, and it’s not bullish.

If you feel compelled to buy into this rally I would suggest focusing on income-producing securities like high quality short-term corporate debt, Treasury bonds and TIPS. Convertible bonds are safer than stocks but will also decline if the market rolls over. I would not lunge after stocks at these levels. This is still a bear market and, worse, credit remains largely unavailable for many segments of the economy, including consumers and businesses.