Don't Be Fooled by Bear-Market Rally

Don't look now but stocks are stampeding through a bear-market rally. That's by no means bad news -- any kind of rally is welcome after what we've been though -- but it's not unconditionally good news, either. That's because all the rally means is that investors must be extra vigilant about taking money off the table. After all, what a bear-market rally giveth, it also taketh away.

That's not to say it hasn't been a quietly stupendous run. The S&P 500 is up about 25% since notching a 12-year low back in November, and it's done so while shrugging off sheaf after sheaf of terrible economic data and news. Never mind falling home prices, rising jobless claims, car sales hitting levels not seen since the early '90s or epically lousy holiday sales. Through all that and then some the market has managed to claw back gains.

Just don't expect it to last. True, turning the page on 2008 no doubt helps, as do expectations for the incoming Obama administration's massive stimulus spending plan. Mostly though, the rally appears to hinge on a growing consensus view that the economy will start to rebound in the second half of 2009. And guess what? That view is almost certainly wrong, growls David Rosenberg, Merrill Lynch's North American economist, in reports published every day of the new trading year.

As Rosenberg, a long-term and thus-far clairvoyant bear, sees it, hopes for a midyear recovery are more than likely to be dashed. "The typical lag between market bottoms and GDP bottoms is four months," the economist wrote Monday. "The longest ever was eight months. If our cyclical barometer is even in the ballpark in terms of accuracy, it is telling us that both the consensus and the market are setting themselves up for possible disappointment on the timing of the recovery."

Let us also not forget that the consensus view was consistently wrong well before the world financial system blew up, Rosenberg wrote Jan. 2. At this time a year ago, the consensus believed the economy was only in a soft patch, stocks were merely in a corrective phase and the Federal Reserve was done cutting short-term interest rates. (Just try to remember the last time "moral hazard" was supposed to preclude another rate cut.) Stocks were a buy and bonds were a sell. Ah, the good old days.

Here we are a year removed and the parallels are spooky. Equity strategists collectively call for the S&P 500 to finish 2009 at 1045, notes Rosenberg. No one forecasts a down year for stocks. We had an identical situation a year ago when the same bunch saw the S&P climbing to 1640. "The experts as a group were only off by 45%," Rosenberg says. The consensus was too high on economic growth, equity valuations and bond yields going into 2008, and we're quite possibly looking at deja vu all over again for 2009.

Furthermore, with household wealth declining at an historic rate, at least another 15% downside to home prices, tight credit and an increasing personal savings rates, Rosenberg sees deflation as being a bigger deal than the consensus does.

"No sooner do we publish our [Monday] report reiterating our major deflationary theme, which is a secular rise in the personal savings rate, than we see this on the front page of The Wall Street Journal -- 'Hard-Hit Families Finally Start Saving, Aggravating Nation's Economic Woes,'" Rosenberg wrote Tuesday. "A must read."

We hate to rudely awaken folks from the pleasant dream that is the current market rally, but as we cautioned recently -- as well as at the beginning of this move -- investors need to take some profits wherever and whenever they can. And don't forget to maintain discipline. As Rosenberg has reminded us presciently before, just because the experts agree that it will be an up year for stocks doesn't make it so.