Don’t Dance with Cinderella

The stock markets last week have made most technical analysts feel ashamed again. While the technical analysts have been yelling how “overbought” the markets are, the stock markets continued to party all the way to year-to-date highs. The Chinese stock market was the most spectacular --- SSEC, the Shanghai Stock Exchange Composite, has climbed from 1,815 to 3,412 in seven months, a whopping 88% gain so far this year. On the other hand, Dow Jones Industrial Average (DJIA) only ran from 9,035 at the beginning of the year to 9,171 last week, a meager 1.5% gain. No wonder why so many parents from the West have forced their kids to learn Chinese. Perhaps China is the future for business and the 21^st century is indeed the Chinese Century.

The so-called explanations for the rally last week, as reported by most analysts, are again the “better-than-expected” financial results from the companies, thanks to their aggressive layoffs and cost cutting plans. Another the so-called “bright” spot of the market was the latest GDP result. While most economists expected - 1 5% GDP growth during the second quarter, it came out only - 1.0%. BUT meanwhile, they revised the GDP figure of the first quarter of 2009 downward from -5.5% to - 6.4%!

Although I am not an economist nor am I a mathematician, please think a little hard about the numbers --- how could they be considered good news? It was thought that the GDP had a - 5.5% in the first quarter and also a -1.5% this quarter. In other words, it was thought that there was a -7.0% in the last two quarters combined. But the actual results were - 6.4% in the first quarter and - 1.0% in the second, a total of - 7.4%! It is actually 0.4% WORSE than most people expected (-7.0% vs. -7.4%)! How on earth could it be good news? Moreover, the current - 1.0% may be revised downward again when the government reports next time. Either the U.S. government has no credibility whatsoever or the statisticians do not even know how to use the calculators.

As I mentioned in my last column, why did the stock markets keep rallying for consecutively three weeks despite the low volumes? My theory is that the U.S. investment banks have been provided with a high level of liquidity by the U.S. government (e.g. almost zero Fed rate and TARP program) and are using the money to invest in equities to bid up the prices, and therefore creating an illusion that the bull market has returned.

Think about it: Who still has money after March 2009 when most individual investors already got their investments cleaned out? It is only the big banks and investment dealers who still have capital left. That is why the volumes have been so low – it’s only the big guys who are playing!

In other words, the stock market is now in the hands of speculative traders that could dump their shares when they think the time is right for them. That is why I do not suggest individual investors to venture the current stock market now because we never know when the big guys will dump the shares. If you start buying stocks at this moment, you are like Cinderella going to the party without wearing a watch. Yes, you may be having a good time at the party and the magic of your glass slippers may make the rally go a little higher. However, the party will eventually be over at midnight --- before you realize that the magic is gone and the time is up.

In fairy tales, there are miracles, dreams and hopes. In stock market, however, there are only bulls, bears and pigs --- and it is always the pigs who believe in fairy tales that got slaughtered.