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Editor's Choice

Bill Fleckenstein

Contrarian Chronicles8/31/2009 12:01 AM ET

Why this rally might head into fall

As weak stocks rally and speculators take control, there are reasons to believe the market could be in for a pullback. But I'm not betting on it -- at least not yet.

By Bill Fleckenstein
MSN Money

Throughout the recent stock market rally, I have proclaimed my agnosticism about what might happen next, although I've been leaning toward the viewpoint that the government's money printing may make stocks go higher.

Thus, I have not wanted to short stocks.

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Find more on short-selling strategies

I have also been somewhat agnostic about the economy, though I have expected an economic bounce based on the restocking of inventories, etc.

Meanwhile, the level of enthusiasm and optimism (for both stocks and the economy) has ratcheted ever higher since March, with speculation heating up along the way.

Companies with dubious prospects like Fannie Mae (FNM, news, msgs), Freddie Mac (FRE, news, msgs), Ambac Financial (ABK, news, msgs), MBIA (MBI, news, msgs), Radian (RDN, news, msgs) and MGIC Investment (MTG, news, msgs) have experienced enormous rallies in the blink of an eye. A chunk of that is a function of short-covering, but some of it has to be raw speculation.

Last week's poster child for this phenomenon? Vonage Holdings (VG, news, msgs), which has no short interest and yet exploded from 50 cents to $2.50 in three days.

Why the wait-and-see strategy?

Taking the above into account -- as well as last week's poll by Investors Intelligence showing that bullish sentiment has reached 51.6% while the bearish side is down to 19.8% -- the market might be ripe for a correction.

However, being "ripe for" and actually undergoing a correction are two different things.

I wouldn't be the least bit surprised to see some sort of serious pullback. But to repeat, for now I have no interest in trying to capitalize on that from the short side, except perhaps by using a couple of ideas for a bit of insurance.

Before deciding if it's time to get aggressively short, I would first prefer to see what happens in the next two months.

Numbers easily beaten

Part of what holds me back, besides all the government money printing, is that many tech companies have set the bar so low in the near term. That, coupled with the inventory-restocking/potential over-ordering now under way, suggests that tech stocks could do well in the game of beat the number, which oftentimes helps buoy the tape at large.

Then there are the technicals of the market, which have improved quite a bit over the course of the year. I am not a technician, but I have found that technical information is worth being aware of as folks make their game plan. In any case, that improvement is one more reason why I'm not in a hurry to get short in a big way.

Short-selling subsides

If the world doesn't come to an end in September or October (right now it looks like it probably won't), I think we could see some sort of mad scramble on the part of the paid-to-play crowd to get even longer.

Should we see a spike after that time, I would then be on red alert for an opportunity to perhaps sell a failing rally or potentially try to get positioned for some sort of a decline. But that is getting a bit ahead of myself.

Continued: Fed can print money, but not metals

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Sunday, August 30, 2009 4:28:44 AM
Bill, how can you call yourself a Contrarian when your ideas are so mainstream?  Everybody knows there could be inflation, but it may not be evident for a couple of years. Prices are dropping now. The food stores are in a cutthroat battle for customers and are slashing prices along with a lot of other industries.  Gold may surprise you on the down side and crash. Third 1/4 earnings will surprise on the downside. Christmas will look gloomy and the market will test its lows.
Sunday, August 30, 2009 9:01:09 AM
Oh Ben won Kenobi....U have to get home values rising ASAP !!!

Inflation is the best way.....worry about the consequences...layta.....

Sunday, August 30, 2009 9:04:07 AM
Oh Ben Won kenobi...U must get home values rising ASAP !!!!

Inflation is the way.....

worry about the consequences layta.......

Sunday, August 30, 2009 9:24:15 AM

This inflation talk is way way too early.  Deflation is bearing down on us like a Sunday morning at Pearl Harbor in 1941.  The majority of the "economissed" don't see it coming and just don't get it.  It doesn't matter how much money Bernancke pumps into the system right now..... inflation is years away.      People with no money and no jobs don't bid up the prices of goods and services. 

Sunday, August 30, 2009 9:06:48 PM
At this point it doesn't matter if people have no money or jobs, if the value of the currency you purchase goods and services with is dropping, the goods and services get more expensive.  The only thing I see deflated is the value of our portfolios and the interest I'm paid on money.  All goods and services including health, food, energy is going up, up, up.  Nice try gumbo, find me something besides your bank account that is deflating.
Monday, August 31, 2009 7:18:13 AM
I predict a flat to slightly down market until earnings and GDP come out for the third quarter. And reality better meet or exceed projections. As for inflation, I am seeing signs that it starting. Loaded up with TIPS already. Can live with low return until all hell breaks loose. The Fed thinks it can handle inflation when it shows up. The time to address it is well before it starts.
Monday, August 31, 2009 7:20:27 AM

Bill,

Take a stand and be expected by your readers.  Nothing in your article is new or profound.  If I was paid to write such simplistic and mostly inane nonsense, I would ASK to be fired if that was my best.

You are an equities BEAR.  Everyone knows that.  You are constantly negative and that puts you where our nation doesn't need you.  Get something out that's meaningful and helpful.

 

Monday, August 31, 2009 8:05:22 AM

Thanks for the thoughts but other than hedging his bets everywhere, nothing contrarian in his articles.  Get a new title

Monday, August 31, 2009 9:31:58 AM
Maybe I'm ignoring revisionist history - but I highly doubt the ability of the printing press to generate inflation - at least in the short-term.

P.s. the contrarian argument is for a massive debt-deflation fueled depression as asset prices continue to implode in the face of mounting job losses, contracting consumer behaviors, and the public recognition of aritifical market manipulation.  Furthermore I fail to realize, in a fiat model, how one can ignore the effects of the fractional reserve multiplier and artificial interest rates on the effective money supply (via the availability of credit).

One of two things will happen in the short term - the fed will contnue to fund the federal deficit by using excess reserves to buy institutional debt (treasuries, etc.) or the fed will release the excess reserves into the wild to chase whatever bubble they'll have next.

Arguably, both will happen, over the course of time - but certainly before inflation strikes.

Monday, August 31, 2009 9:32:39 AM

Many say there is nothing contrarian in toady's chronicle!

I say ...I love you man!!!!

That's a contrarian view today!!!

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