Can we trust the rally?

In the past few days, global stock markets have rallied about +10% from decade-plus lows. Today, the US market was again in rally mode, only to lose steam during the infamous final hour to close slightly down. The question on investors’ minds is, “Is this rally for real?” Will we see a significant rise in stock prices from here, or is this just another brief respite before yet lower lows?

It’s obviously too early to tell, but several signs suggest that this rally may have “legs.” Even if it is a countertrend rally rather than the first of a new bull market, it may last for a while and generate a welcome partial recovery in stock prices. My reasons for thinking this are several:
1. Volume has been higher recently on up moves than on down moves.
2. The number of stocks hitting new lows was declining even as the major averages took out their October and November bottoms.
3. The bulk of sellers recently appear to be individuals (“dumb” money) rather than hedge funds and institutions (“smart” money).
4. A lot of news lately has been better than expected:
• Several big banks announced that they’re actually making money so far this year.
• GE’s downgrade was less than expected and the company now has a stable credit outlook.
• Retail sales were higher than expected.
• Home sales were up in California.

Calling the end of this grueling bear market is still premature, but we’re overdue for a significant rally. Hopefully we’re in it now.

And regardless of the short term picture, the longer-term outlook for stocks remains bright. Sometime soon we will set generational lows for stock prices that we may never see again. Perhaps we already established these lows last week at an S&P 500 of 666 (a good omen?). Wherever and whenever that elusive bottom comes, we will look back on it years from now as an historic long-term opportunity that most people will have missed out of short-term fear.