Our memory of the recent rally was on kicked-off by a bogus memo from Citigroup CEO Vikram Pandit about profitability, followed by a load of baloney from stress test regulators about banks’ health.

“People also are beginning to question whether the economic fundamentals are strong enough to justify continued gains,” continues the WSJ. This has got to be one of the most naïve sentences ever written. The 40% rise in stocks since early March never had anything to do with a 40% increase in economic fundamentals. The economy is collapsing (albeit at a slightly slower pace than before).

Stocks rose because the same “irrational exuberance” that got us into trouble in the first place caused investors to ignore economic fundamentals and pile into equities on the basis that the government wouldn’t let any more failed companies go bust. At no point during this rally did economic fundamentals improve. Economic news was simply less bad than before.

The following three indicators should make it patently clear to investors that stocks are in trouble.

1. There has been a consistent drop in trading volume going back to April. Average daily volume for all NYSE stocks hit a record of 7.21 billion shares in March (much of which was thanks to program trading by Goldman Sachs on the bank’s principle account). That fell to 6.42 billion in April… and 5.14 billion in May. This is below the average of 6.15 billion shares traded a day in 2009. In a true bull market, trading volumes tend to rise as more and more investors pour into stocks.

2. New stock issuance hit a record in May. This has dramatically increased supply at the same time that demand (as measured by trading volume) is falling off.

3. Senior corporate officers are net sellers, not buyers. This inside selling is inconsistent with a real bull run.

Here at Notes we have repeatedly stated that there has been money to be made in the recent upswing but that investors better be nimble to avoid the inevitable bull trap. We repeat this warning again today. If you are investing in equities, keep a close eye on events. Right now, you’re money is sitting in dangerous quicksand.

The beginning of the end for the stock market rally is finally here, says Payout Trader editor and technical analyst Charles Delvalle. Charles has been predicting a sell-off for quite some time. Here’s what he has to say on the subject:

After staying above the 20-day moving average since March 12, the Dow finally broke under it on June 16. Four days later, the Dow is trying desperately to stay above its 50-day moving average.

This signals an end to the shocking display of strength the market has shown in recent months.

Typically market bottoms are not V-shaped. They are usually W-shaped or form a reverse head-and-shoulders pattern. For example, after the last bear market the Dow formed a reverse head-and-shoulders pattern before signaling the start of the following multi-year bull run.

Let’s be clear. The “green shoots” hysteria in the mainstream media was designed to boost consumer and investor optimism and to send stocks higher. (Remember, the mainstream media needs large corporations – their advertisers – to succeed as much as Washington does.) The “green shoots” rarely indicated that the economy was improving. More often than not, they simply signaled that things were getting worse more slowly.

For readers taken in by the “green shoots” meme, it may surprise you that the Fed’s recent Flow of Funds report – which tracks the country’s financial flows – shows that credit conditions actually got worse in the first quarter of 2009.

As underground investor Dr Martin Weiss points out, “This directly contradicts Washington’s thesis that the government’s TARP program and the Fed’s massive rescue efforts began to have an impact early in the year.”

Weiss, of MoneyAndMarkets.com, says, “ The credit market shutdown actually gained tremendous momentum in the first quarter. And although it’s natural to expect some temporary stabilization from the government’s massive interventions, the first quarter was SO bad, it’s impossible for me to imagine any scenario in which the crisis could be declared ‘over.’”

Here are the facts Weiss has compiled about credit conditions in Q1 2009:

1. We witnessed one of the biggest collapses of all time in “open market paper” – mostly short-term credit provided to finance mortgages, auto loans, and other businesses. Instead of growing as it had in almost every prior quarter in history, it collapsed at the annual rate of $662.5 billion.

2. Bank lending went into the toilet. Even in the fourth quarter, when the meltdown struck, banks were still growing their loan portfolios at an annual pace of $839.7 billion. But in the first quarter, they did far more than just cut back on new lending. They actually took in loan repayments (or called in existing loans at a much faster pace than they extended new ones! They literally pulled out of the credit markets at the astonishing pace of $856.4 billion per year, their biggest cutback of all time.

3. Meanwhile, nonbank lenders pulled out at the annual rate of $468 billion, also the worst on record.

4. Mortgage lenders  pulled out for a third straight month. (Their worst on record was in the prior quarter.)

5. And consumers  were shoved out of the market for credit at the annual pace of $90.7 billion, the worst on record.

6. The ONLY major player still borrowing money in big amounts was the United States Treasury Department , sopping up $1,442.8 billion of the credit available – and leaving LESS than nothing for the private sector as a whole.

This is all very bad news indeed for the economy. And if it’s been reported in the mainstream media, we have yet to see it.

The mindless optimism that has infected markets in America this week – has enabled big U.S financial companies to binge like John Prescott… but on fund-raising… not cakes. Between them, they have raised more than $28 billion, which suggests that many investors believe the sector is poised for a strong comeback.

Just yesterday, we saw Merrill Lynch raise $7 billon — and that was after it raised $2.5 billion from a preferred share sale on Monday. Merchant bank Goldman Sachs and the commercial finance group CIT each raised $1.5 billion. On Monday, Citigroup raised $6 billion in new capital through a sale of preferred shares. Ditto with JPMorgan Chase last week…

There are obviously a lot of investors out there who are convinced that the U.S. financial industry is poised for a strong comeback. Citigroup’s chief executive, Vikram Pandit, has added his voice to the chorus of Wall Street bankers arguing that the worst of the credit crisis was over. “We are closer to the end” than the beginning of the crisis, he said at a shareholder meeting in which he and his fellow directors were criticised for the company’s recent performance.

Of course, given his circumstances, saying that there was worse to come couldn’t really have seemed like an appealing option. Then again, he might have been expressing an entirely honest view — in which case we think that he is dead wrong.

Here at Profit Hunter, we think that investors betting on a quick turnaround in the U.S. financial sector are setting themselves up for a massive hit. There is a lot more bad news to come.

What we need to remember about the current financial crisis is its roots in the U.S. sub-prime debacle. Huge numbers of people bought houses that they couldn’t really afford with money that they didn’t actually have in the hope that house prices would just keep on rising. They didn’t.

U.S. house prices nationwide have already fallen by an average 15 per cent since their peak in 2006, leading to wave of defaults on mortgage payments. Investors who bought the securities backed by those mortgages have taken massive losses as their values plummeted. Simply put, the health of the U.S. financial system is closely tied to the performance of the property market. And I believe that things are going to get a lot worse on that front, which rules out any quick and sustained recovery in the U.S. financial markets.

You see, the highly respected Yale University economist Robert Shiller predicts that there is a good chance that U.S. house prices will fall further than the 30% drop during the 1930s Great Depression. Shiller is a big name in property economics – he developed the widely watched Standard & Poor’s/Case-Shiller home price index. By Shiller’s estimation U.S. house prices rose by about 85 per cent from 1997 to their peak in 2006, after adjusting for inflation. That was the biggest national housing boom in US history, so the fall could be just as historic, Shiller predicts.

It doesn’t sound very promising, but George Bush offers this bit of encouraging news: “We’re not in a recession,” he told reporters at a news conference in with the leaders of Canada and Mexico. “We’re in a slowdown… there’s no question we are in a slowdown.”

Between a rock and hard place…

The Federal Reserve is expected to try to do something about that “slowdown” when it meets next week. Another interest rate cut seems to be on the table. But, as I have pointed out in this newsletter before, the real danger with this spate of rate cuts is that they may simply end-up fuelling inflation while doing very little for the economy.

We may already be at that point. The National Association of Realtors, Lawrence Yun, is now warning that further rate cuts might actually drive mortgage rates higher as financial markets begin to worry more about inflation. Listening to Larry Yun makes me feel a twinge of pity for Ben Bernanke. It can’t really be fun being the head of a central bank right now; particularly not the Fed.

Whether the debacle we are now seeing in America will be played out on this side of the Atlantic as our own housing bubble deflates, I honestly don’t know but our investment strategy at Profit Hunter is clear. We are staying away from the U.S. and most U.K shares. Instead we are sending our money to sunnier climes.

In fact we’ve been helping our readers send their money to sunnier climes for years – as we have hunted down the best profit opportunities across the emerging markets

One such market I’ve got my eye on looks about to take a very lucrative turn. Calling the bottom of a market is a very tricky business… at present we’re looking at one such market that is as close to the bottom as I’d care to call. I firmly believe that it’s about to shoot up and make everybody who gets in now very happy. Find out what exactly I’m talking about – and where in the market you should have your money by clicking here right now.

All the best

Manraaj Singh

Editor

Profit Hunter