A Rally In The Making?

"Better bread with water than cake with trouble." - Russian proverb

The markets in the United States continue to tear higher while around the globe rallies are starting to appear.  The big question is whether this rally is sustainable or whether this is another head fake ready to catch out the unsuspecting sucker.

Taking the United States as a start it does appear that things are settling down after the last few years of fear.  The housing mess seems to be contained and while the prices of homes are not on the rise the rate of price decline is slowing.  Furthermore the system of allowing households to walk from their debt will ultimately allow the inventory to clear out faster and allow the consumer to recover faster than in other parts of the world where the balance owed still needs to be paid back.  Employment is still weak but is not deteriorating and company earnings seem to be relatively stable.

On the European front it is generally agreed that while the Greek problem will not end well that it will be contained.  I would imagine that on March 20th when the first Greek default is feared that there will be some kind of a settlement.  If there is not then I fear the worst for global markets, but even a mix of different political and ethnic backgrounds will agree that not solving the problem in time is not an option.

Certainly the world is completely swamped with debt and I believe that this will create a drag on economic growth for many years to come (see my blog on Crowding Out) but on the surface it does appear that the worst is behind us (at least for now).  Not that there are not plenty of issues that could derail us at a moments notice, but the markets are showing signs that the future is a lot more clear than it was late last year.

So is it time to jump in?  I think that if you are a relatively short term trader that you can make money in this stock environment.  Also there are a lot of stocks that are paying a decent dividend that look attractive.  Looking back at history and the 70's which was considered by many in the business world to be a lost decade, the market during that period did not move.  It entered the decade at around 100 and ended the decade around the same level.  However looking at the monthly chart it shows some massive swings.  The market peaked around 114 in 1973 and then nosedived to 65 by 1975 and recovered most of the losses by 1977 only to jitter around that level until the end of the decade.  Not that we face all of the same issues, but I believe that the large global debt levels will create a drag on global economic growth for at least the next decade and that this drag will show up in new problems in the future.  Rallies will be shorter and recessions more regular until such time as we can remove these large burdens.  At that point in time we can look forward to robust growth, but for now I would remain predominantly in a cash position but I feel that the next three months could continue to produce upside.  However, if the Greek deal does not go through then all bets are off the table.  Remain cautious but for those of you with a high risk tolerance it may be time to dip your toe back into the water.