Is this rally over? I am really cautious now .

I was reading an article from barrons, which I feel is very important to share with my readers.

The U.S. dollar index peaked at the same time the stock market bottomed in March. Since then, the greenback is down 13%, which happens to approximate the year-to-date gain in stocks, though of course the equity market is up 50% since the March low. Nearly every bit of the year's upside has been logged on days when the dollar was weaker. In addition, the Dow Jones Global Ex-U.S. index is up about double the S&P 500's gain, and only five of two dozen national markets, all in Old Europe, have done worse than the U.S. in dollar terms.

These inter-asset relationships probably will change, or at least become less reliable on a daily basis, but it's hard to say when or why. For what it's worth, perhaps the most consensus-bucking opinion on Wall Street is that the dollar could firm or strengthen without obliterating stocks.

Whether this rebound is now fully priced in is the subject of a valid argument, with the equity market no longer appearing cheap. But it's tough to dispute that the profit spring is quite compressed.

The market is at an interesting juncture now -- more so than most times, even.

A year ago, the most resolute bears were calling for the S&P to sink to 1000. Six months ago, the boldest bulls thought we could get up to 1000. We're there.



It shows this rally to have about equaled the duration and magnitude of the doomed rebound off the 1929 lows, and to have outpaced the other post-bear recoveries of the past century.

Another chart worth looking at is how far we are



This chart looks not at the possible amount markets can fall, but rather, how much further the rally can run. It compares 3 prior bottoms with the current one.

Some comments from on above chart :
This rally at this stage is way ahead of all other “real” market recoveries and is most like ‘29-30, thus we can’t plausibly expect it to deliver more upside soon and the market probably needs to correct hard.

I don’t view this as any raging contra signal, just another indication that sentiment remains more cautious than one might expect after a 50% ramp.

Fed rates unchanged

As expected the Federal Reserve left its key fed funds rate unchanged today. More importantly for the stock market they said they will keep this key rate at exceptionally low levels for an extended period of time. This translates into continued low rates on money market funds which average a paltry .25%. With a tremendous amount of cash on the sidelines earning practically nothing we think these investors are going to add some of their money back into stocks fueling the market higher.

Positive comments from the FOMC meeting today sent the averages soaring. The Dow jumped 120 points +1.3%, S&P 500 +1.15% and NASDAQ +1.47%. 72% of the stocks listed on the NYSE traded on the upside and 68% on the NASDAQ.


The recent peak prices for the advance that began at the March lows were Industrials, 9370.07 and Transports, 3749.58 -- both of those highs were recorded on August 7.

Yesterday the Dow closed at 9241.45 while the Transports closed at 3702.98. In other words, the Industrials closed 129 points below their August 7 peak. The Transports closed 47 points below their August 7 peak.

If this advance is to continue, then both Averages will have to rally and close at new highs above their August 7 peaks. If they can't do that or if only one Average betters its August 7 peak, then we are dealing with potential trouble.

Rising stock market will brighten the hearts of Investors

Monetary and fiscal stimulus, along with a rebuilding of inventories will be tailwinds for the U.S. economy for the rest of 2009. These positive effects will begin to fade in 2010 at the same time as consumer spending is constrained by high debt levels. A W-shaped recovery will set in, consistent with the muted growth rates.

In the U.S., inflation risk and currency risk are linked. Should U.S. policymakers lack the commitment or the skill to drain the system of emergency liquidity at the appropriate time, confidence in the U.S. dollar as the world’s reserve currency could erode.

Real estate represents collateral for the entire US economic system. At this point, I'm most interested to see what will happen to real estate (private and commercial) now that the stock market trend has turned bullish. The current conventional wisdom is that real estate will remain "down in the dumps" for years to come. Furthermore, thousands of forthcoming foreclosures will make it that much worse.

My own opinion is that a great deal of real estate (homes, condos) are now underpriced -- they are offered for sale at below replacement cost. Interest rates are low (assuming you can get a mortgage).
At certain times, the stock market and the economy will tend to interact with each other. In other words, a rising stock market will brighten the hearts of investors and the public, and in turn a happy public along with optimistic investors will generate bullish pressure on both the economy and the stock market.