Caught Up in a Sucker's Rally?

www.rufftimes.com

With the S&P now a third higher than it was just 60 days ago, many have turned into stock market cheerleaders, doing jumping jacks and shouting the “irrefutable” news that a new bull market has just been born.

Well…you might want to just hold your horses.

The mere fact that the market is up after so many months of gloomy news is not exactly proof of an economic upswing. It is, in fact, so symptomatic of a recession/depression that the phenomenon has its own name:

The bear market or sucker’s rally.

“The granddaddy of all bear markets, 1929 -1932, had six false alarms with an average gain of percent. And Japan's ongoing bear saw the Nikkei rise by at least a third four times in its first four years with 10 more false dawns since then,” wrote reporter Spencer Jakob in the Financial Times.

“An authority on bear market bottoms, Russell Napier of CLSA, sees a 1974-1976 scenario unfolding followed by an even worse slump. In Anatomy of the Bear, he scanned media coverage around the bottoms of 1921, 1932, 1949 and 1982 and does not see the apathy that characterized those turning points.

“For the great bear market bottoms, you need a society-wide revulsion with equities,’ he said. ‘It just doesn't smell like the big one yet.”

Another sign? Stocks also become very cheap before major bull markets begin. Yet the 2000 bubble never fully deflated and even the recent low did not breach 11 times.

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WHAT TO DO ABOUT IT

FIRST: I agree with this well-reasoned analysis. We will not see a new bull market for several years, but we will see several fake-outs, as we always do during such bear markets. Sometimes my success is measured not by the money you subscribers make, but by the money you didn’t lose. This is one of those times.

Avoid the Dow Jones Industrials, growth mutual funds and most stocks. They will wander around the bottom and drift lower for many years to come. Over the next three years, the big money will be made by a small minority who are willing to go against the Wall Street grain.

SECOND, if you are a true contrarian, you will ignore the stock market, except for a few industry groups, which I have already discussed and will discuss in future newsletters, and you must concentrate on preserving your capital, assuming the dollar will continue to lose value as it has been in slow motion over a hundred years. This will turn into an eventual price explosion in inflation hedges. Invest in bullion, particularly the hold-it-in-your-hands kind. Hide them in a safe place.