Bear Rally Recalls Ballerina’s Fatal Dance

We’ve got a nickname for the bear rally begun last March on Wall Street:  the “Red Shoes Market”. The metaphor alludes to the classic 1948 British film based on Hans Christian Andersen’s dark fairy tale. Every cinema buff knows the story of the ballerina, played by Moira Shearer, who couldn’t stop dancing after she put on a pair of enchanted crimson ballet slippers. Eventually she danced herself to death. That’s exactly what we foresee for the stock market once the mad energy that has powered the rally has been spent. That this will occur is all but certain, since the economy, green shoots and phony recovery statistics aside, is edging toward Depression.

Like the ballerina, frenzied investors have no control over their actions. Even though many portfolio managers evidently believe it will all end badly, they cannot move to the sidelines for a breather while stocks continue to move relentlessly higher, as they have been for the last eight months. Shares have soared mainly because of the government’s innumerable bailout programs. The giveaways have produced a glut of liquidity in the financial sector that has nowhere to go but into stocks and bonds. Business loans are shrinking because both borrowers and lenders alike are skittish about taking on more debt as the economy has continued to weaken. The result is that lendable reserves have found their way into the securities markets, pushing valuations to historical extremes.

Amazing Rally

What amazes most about the rally is that it keeps on going even as the country’s economic and political future grow murkier each day. It is said that the stock market abhors uncertainty, but we can’t recall a time in the U.S. when there was more of it than now. We’ve got a dithering President whose radical domestic agenda has bogged down badly -- not only in Congress, but in the heartland. And his foreign policy, while appealing perhaps to Norwegians, is making the U.S. look dangerously weak to the rest of the world. Obama’s poll numbers are slipping so rapidly that it’s arguable he’s a lame duck president after less than a year in office. The argument will be sealed if the health care proposal goes down in flames, as Americans should be praying it does.

And yet, with the U.S. dangerously adrift both domestically and abroad, the stock market has been acting as though good times are just around the corner.  In reality, the lemmings of the money management world, like the ballerina, have no choice but to keep on buying until the next economic or geopolitical catastrophe hits like a bolt from the blue.

Rick Ackerman

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Rick Ackerman is the editor of Rick’s Picks, a daily trading newsletter and intraday advisory packed with detailed strategies, fresh ideas and plain old horse sense. You can subscribe by clicking here.