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US stocks have rebounded remarkably to a high of DJIA 8212 and S&P500 877 on 1 May 2009, rising 25% and 29% from lows of DJIA 6546 and S&P500 676 on 9 March 2009.

Water seems fine

But fencesitters must not regret not pouncing on cheap stocks last March for it is simply too early to call a bottom. During bear markets, false starts are expected as markets are driven by emotions resulting in a possible sucker's rally.

Diving into the market this early is gambling; you can either double your money or lose it altogether. Too much forthcoming bad news has yet to be factored in, so it is safe to say the recent rally is a bear-market rally. I will not be surprised if the same funds being traded that pushed oil prices over US$147 per barrel in July last year are the very same ones responsible for the current rallies.

It's too early to celebrate. How can we celebrate when

  1. Toxic assets are still inflicting damage as US home prices still have room to fall, while US commercial property prices face an imminent crash as businesses cease operations?
  2. Massive bankruptcies are yet to be filed?
  3. Credit card and corporate defaults are just around the corner?
  4. Job losses will discourage consumer spending?
  5. Quarterly earning reports have yet to rear their ugly heads?

Jumping into the volatile market this early is no different from playing the casino—a 50-50 proposition where you can double your pot or lose your shirt in a single dice throw. Speculating, although immensely exciting and instantly gratifying, is unsustainable for the long haul as the law of averages is bound to catch up with you.

We all need to pinpoint painful realities and mere hopeful fantasies. We also need a tremendous amount of self discipline and willpower to not follow the herd.

It may be best to let gravity take its course and let things seek their natural level, while being alert to catch the good stuff on its way down to a level that reflects a fair value.

Market action can be puzzling at times as it continues to rise amid dramatic GDP decreases, the Chrysler bankruptcy, and swine flu. But we must ask ourselves: What if an irrationally excited market suddenly comes to its senses and becomes rationally sober again?

Print ed: 06/09


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