Rallying Back From The Depths Of Hell

The market has to rally something, and this is as good as any. The DJIA has fallen from 13,850 less than a year ago to 7,552. The idea that Citigroup (C) may be for sale could take its potential failure off the table. Congress appears ready to capitulate and give car companies money that they can pile up in the streets of Detroit and burn.

If the market takes off for a few days, it will do so in a haze of amnesia. Buyers can leave behind memories that economists are predicting 8% or 9% unemployment and contracting GDP. The government has still not found a key to the lock of falling home prices. Marrying joblessness with housing value deflation and next year could be the worst the economy has seen in five decades. Or, it could be worse.

Investors like rallies because they are fun and feed naive optimism that the market can push its way up day after day and month after month. But, in a bad economy, the smart money uses a rally to cash out and the dumb money gets left with less than it had hoped for.

Experts on the market and technical traders are calling for the Dow to reclaim 10,000. That almost happened early this month but profit-taking and news that the economy was imploding dragged it down into the Inferno.

Rallies usually feed upon themselves, at least short-term. Short covering and the resulting centrifugal energy of buying gets a temporary boost. That can last a week or so and then it blows itself out.

Looking with an empirical eye, there is no reason for a rally at all. The market made a vicious correction in 1973 and 1974. Many indicators say this recession will be worse than that one.

Rally on. It won’t even last until Christmas.

Douglas A. McIntyre