Thursday, July 10, 2008

Nature of a Bear Market Rally

Bear Market rallies are sharp & vicious. This happens for two reasons. First is the bears who are caught unawares at a suddenly developing rally. They rush to close their short positions which fuels the ally even more. Second is the undying optimism of the masses. Every time there is an up tick, the retail trader thinks this may be the start of another super bull market. He then rushes to buy, hoping to catch the very lows.

Eric Roseman, blogger, (http://rosemanblog.sovereignsociety.com/2008/07/bear-market-ral.html) says: Bear market rallies tend to be awfully convincing. Previous bear market rallies from 2000 to 2002 resulted in big single-digit gains for global stocks. But gains were savagely cut as investors eventually headed for the exits at the same time as the economy deteriorated until prices finally bottomed in October 2002. But by then, the MSCI World Index had plunged more than 50% from its March 2000 all-time high and the S&P 500 Index more than 40%.

More cheer comes in from News Corp. Chief Rupert Murdoch who Says He's `Very Bearish' on Economy as food and energy prices rise for consumers. . Bloomberg.com quotes him : ``Every country in the world has serious food inflation and then of course you've got the same thing with energy,'' he said. ``It's really squeezed.''

Bloomberg again. If you want to know how capitalism committed suicide read this: http://www.bloomberg.com/apps/news?pid=20601039&sid=a11PeBn6TV8A&refer=home

What is Fannie Mae and Freddie Mac ? These are two companies in the USA which are the biggest providers of financing for U.S. home loans. Something like the State Bank, National Housing Board, HDFC & LIC taken together, only much bigger. Both these comapnies are now bankrupt since they have more laibilities than assets. It does appear that the American Economy has more downside left as new problems crop up.