Is the bull back? Not so fast, according to market history.

The MSCI World Index and the S&P 500 Index posted their best monthly gains since April 2003 gaining 10.9% and 9.4%, respectively. Credit spreads or the difference between super-safe Treasury bonds and riskier bonds saw risk premiums plunge last month while 90-day LIBOR rates rallied from 1.19% on March 31 to 1.02% yesterday.

Indeed, even the most adamant bear would have to consign some flexibility to this rally, which has swallowed most asset classes since March 9. Stocks, non-Treasury bonds, most commodities and REITs have all participated in a broad-based rally over the last seven weeks.

But before popping the champagne let’s not forget that back in early March stocks were pricing in a depression following a stunning 58% peak-to-trough collapse since October 2007. Banks have led this rally since March 9 (+76%) and the same banks will be responsible for its eventual demise.

My view remains the same since March: This is a bear market rally just like the prior three rallies that occurred from late 2007 until March. Ultimately, we might not break through the March 9 lows this year but the odds remain high that we’ll retest those lows this summer.

Wall Street analysts and many European investment strategists continue to believe that we’re in a new bull market driven by massive government stimulus, cheap valuations and near-zero global interest rates. That might be possible but, in all probability, it’s highly unlikely.

Housing prices are still declining, unemployment hasn’t stabilized, domestic consumption is way down and deflation is officially in town since March for the first time since 1955, meaning companies don’t have the flexibility to mark up their goods and services. Furthermore, no bull currently alive has ever witnessed a credit deflation; it would be unwise to underestimate the scope and duration of credit destruction and the time required to heal business and consumer balance sheets.

A long-time bear who eventually enjoyed his day in the sun starting in late 2007 is Albert Edwards of Société Général in London. According to Edwards, “The current pop in the market is not dissimilar to the many bear market rallies between 1929-1933 where signs of economic stabilization were met with strong 25% rallies, most especially in late 1929 and mid-1931. This optimism was subsequently crushed.”



The above table depicts the long sequence of bear market rallies during the Great Depression. The Dow posted a total of five false rallies until bottoming for good at 41.22 in July 1932. The length of the current rally thus far is seven weeks; from 1929 until mid-1932 the average bear market rally lasted 10.1 weeks, suggesting there’s still some juice left in this upward march. But the Piper is coming.

Back in February and March I also suggested it would be a good time for long-term investors to begin accumulating stocks following the second worst crash since 1929. I still believe March marked a good entry point to add value. Yet I don’t think we’re through the worst yet, either.

The massive up-crash we’ve seen since March has been alarming. Previous bull markets in history have typically been accompanied by some profit-taking and healthy backing and filling; that’s not happening with this rally, which has been characterized by vicious rallies almost every other day without a pause or correction. I don’t like this action.

Meanwhile, it’s hard to be a bear this spring. I find my place at the table is a lonely one as stocks and non-Treasury bonds skyrocket. Still, I’m sticking to my guns and remain heavily under-weighted in stocks; in fact, my net exposure is net short or negatively exposed to equities.

Have a nice weekend. See you on Monday.