Why the Stock Market Rally Is a Lie
Aug 1st, 2008 | By Eric Roseman | Category: Stock Market InvestingEric Roseman, Investment Director at The Sovereign Society, provides more evidence that financial stocks are still trapped in a bear market. While the stock market stages an impressive rally, credit markets attest to an ongoing crunch. Inter-bank lending rates are still high and credit spreads continue to widen. Eric says credit is where the smart money lies on Wall Street. Until these markets stabilize, stay underweight in stocks…
Financial stocks continue to rally this month, despite some horrid earnings released for the second quarter. It also looks like the stock market is gradually discounting a recovery over the next several months. The dollar is strengthening, housing and bank stocks are rallying and volatility indexes are trading 30% below their highs over the last 12 months.
But unfortunately, you won’t hear the truth about these markets from stocks. On the contrary, the real truth lies in the credit market. Personally, I’ve got my eyes glued to several key credit indicators to figure out the extent of these economic problems.
I’ve got many updates I think you’ll find quite interesting. All of my indicators are still flashing red - saying the credit crunch is not done yet.
LIBOR Says: Banks Are NOT Ready to Hand Over Money Yet
Since Tuesday’s big stock market rally the majority of credit spreads have actually widened, not tightened. If the stock market really was firming up, then we should be seeing a rally in higher risk credits like high-yield bonds, corporate debt and mortgage-backed securities, but we’re not. Also, inter-bank lending rates are still high (see LIBOR above).
But on Tuesday, these credit markets posted losses when stocks rallied. That tells me this is NOT a broad-based rally in all markets. It suggests that although some confidence might have returned to the equity markets that is certainly not the case for credit. And credit is where the smart money lies on Wall Street.
Until the credit markets start to stabilize, you should remain under-weighted in stocks. It’s still too early to load-up on equities again. Credit markets don’t lie. Stocks do.
Source: Don’t Be Fooled By This Misleading Market
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Eric serves as an editor and Investment Director for The Sovereign Society's Commodity Trend Alert. Eric's talents include blending a dozen or more alternative investment funds to produce consistent returns to traditional asset classes and making commodity based recommendations with huge upside and limited downside.
