Spring Lamb Market

My son just informed me that the snow we are having is too near the birthday of a spring lamb like himself. I hate to remind him that such young creatures often end up with mint sauce on the side at Easter. The cavorting market of the past month may meet a similar fate. I also am optimistic (hopeful) that the worst of the stock market may be behind us but not without some testing.

The 25% rally in three weeks certainly felt good. But to expect that it presages the beginning of a V-shaped recovery simply is wishful thinking.

The market has suddenly priced in significant rebound in earnings that are unlikely to emerge for some time. What I find most troubling is the sectors that have climbed the highest and fastest. Leisure/accomodation has gained 35%, homebuilders, 40% and retail stocks up 30%.

These consumer driven sectors may have presented some good short covering opportunities, but to expect consumer driven industries to drive the recovery flies in the face of sober reality. Increased consumer spending and tight credit means game over for many of the business models built on ever expanding consumption.

There have been a few comparable gains in such a short period.

* December 1929
* June 1931
* August 1932
* May 1933
* July 1938
* September 1982

Only in September 1982 and in May 1933 was it the beginning of a prolonged bull market. In 1982 the markets were coming off of extremely high interest rate levels and beginning a secular decline in interest rates that was to last 25 years. 1933 and in 1933 Franklin Roosevelt was inaugurated and took the United States off the gold standard unleashing a wave of monetary stimulus.

Clearly the 1982 event does not contain a background comparable to today. The 1933 change of administration and radical departures from practices that mired the nation in depression may have similarities that only history will determine. However, I think we can expect a retracement of much of the recent gains and hopefully followed by a successful test of the recent market lows. The only thing worst than being late to the party is being arrested by the cops before you even finished your first drink. We suggest cautious sipping.

The charts still show a definite intact downtrend, albeit a few hopeful sprigs. But like the snow covered flowers in our garden, they may not all make it. Don't count your tulips before they are bloomed.



The technically overbought condition, the beginning of quarterly earnings reports and historical "outlier" characteristic of this lovely four week run makes me willing to protect some of the recent profits while remaining hopeful that spring is perhaps near at hand.

John Barnyak
President
www.stonehouseasset.com