May & June's Fake Out Rally

The Feral Capitalist is going on record to say this is a Fake Out Rally. Fundamental and technical indicators are divergent.

Sure, the technicals point to the 200 day moving avg being broken (on the daily view), but there are no fundamental changes to support such an increase in equity valuations. Unemployment is still rising, mortgage delinquencies are rising (although they are being held off the balance sheet so as not to report the loss), and the commercial real estate meltdown is yet to roll through the system.

Investors are tired of sitting on their reserves and it is burning a whole in their money market accounts, so they buy equities. With GM and Citi’s removal from the DOW and Cisco & Traveler’s addition to the index, that is a reason to hope.

Hope is the slope the dumb money rides all the way to the bottom.

If you want the real picture, look at the technicals from a weekly and monthly point of view. There are many resistance levels to bust through before the fundamentals begin to approach technicals again.

Look for P/E ratios around 10 or even single digits before it’s all over.

Look for the Feral Capitalist to buy your sold shares at the end of the 3Q or the beginning of the 4Q.

-- Lache, The Feral Capitalist