Fleet Street Daily editor Ben Traynor says Monday’s post-bailout stock-market rally is unlikely to be repeated again anytime soon. And as long as the roots of the financial problem - too much junk debt in the system - still exist, Ben says investors should treat any stock rally with extreme caution.

This from Fleet Street Daily:

Monday was one of the best chances traders had to make money in quite a while. And, once the markets realise the Fannie/Freddie bail-out is not the magic bullet they hoped, it could be a while yet before we see another rally like yesterday’s.

So, [due to a technical problem at the Stock Exchange] much of London missed out on the worldwide equities field day. The big question, though, is whether the Fannie/Freddie news, and the rally that followed it, mark a turning point for the financial crisis.

I suspect not. I suspect traders and investors were so desperate for a psychological boost, they latched onto something everyone knew was going to happen anyway. Probably most knew the rally was phony. But they also reckoned (rightly, as it turned out) that the market as a whole would react favourably to the news from the US — despite the fact that it was wholly anticipated.

If enough people buy stocks because they expect a rally, it becomes a self-fulfilling prophecy. Markets are always driven by sentiment. That is especially true in these volatile times.

Profit Hunter’s Manraaj Singh agrees. As he wrote to his subscribers yesterday:

“We have seen markets rally at every suggestion of a government bail-out of the US financial sector throughout this crisis. Just think back to March when the Fed provided $29 billion of financing for JP Morgan’s bail-out of Bear Stearns.”

Manraaj reckons the roots of the crisis persist:

“The latest bail-out has given markets a big psychological boost. But it still doesn’t tackle the systemic risk within the financial system. To do that, the US government would have to take clear steps to buy up most of the dodgy debt floating about in the US financial system”What we’re seeing here is just another dead cat bounce.”

There are other reasons to be cautious. One indicator we like here at Fleet Street is the Baltic Dry Index. The Baltic Dry Index tracks the movement of freight shipping rates. As such it gives an indication of the state of world demand for goods and raw materials.

The Index has been falling since June. Yesterday it continued its downward trend. Real economies are still facing all the same problems they did last week. Yesterday’s stock market exuberance can’t hide that.

Any optimism right now should, at most, be cautious optimism. And pretty soon I expect it will be relegated back to mere caution.

Source: Time For Cautious Optimism? Or Just Caution?