Market Talk

Just what kind of bull is this?

US stocks are on pace for their best quarterly finish in more than 10 years, yet it’s still nearly impossible to determine whether this ferocious rally is the beginning of a sustainable bull market or just a cyclical run-up amid a much deeper bear market.

The Dow closed down 47 at 9742, cutting into yesterday’s 124-point gain, but the index is still on pace for its best quarterly performance since 4Q98. Despite the rally, treasury yields have dropped to levels last seen in the spring, prompting concern about the underlying reason for the increased demand.

“Investors’ appetite for long-term Treasuries could be a bad sign for the economy, if it’s based on buyers’ desire to lock in safe fixed returns because they believe the economic recovery will be cut short,” says LA Times’ Money & Co blogger Tom Petruno.

The 30-year Treasury bond at 4.03% is an important level to watch. He cites Tony Crescenzi, a bond portfolio manager at Pimco, who says a slide through the 4% level would suggest a “breakdown” of faith concerning the economic recovery.

Nevertheless, stocks have gained nearly 15% in 3Q, with the quarter officially coming to an end tomorrow. But even amid the rising stock market, many bearish indicators are still prevalent.

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Certainly seems like stocks only go up these days, doesn’t it?

The Dow, which has rallied about 50% off the March lows, has posted seven consecutive days of gains and is poised today to extend the winning streak to eight. Better-than-expected earnings reports, optimistic economic data points and hopes of a bottoming housing market have fueled the rally, but determining whether this is the beginning of a sustainable economic recovery or just one big bear-market rally is the underlying question investors need to keep asking themselves.

Market observers have been saying the summer rally’s been overextended for weeks now, yet stocks have still managed to climb higher. Now, bearish sentiment among newsletter writers has fallen to its lowest level since October 2007, possibly marking “another classic sign of a toppy market,” LA Times Money & Co blogger Tom Petruno says.

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(Editor’s note: this was originally posted without acknowledging that it was written by Newswires’ Ed Welsch. Our apologies to the author.)

This is still a bear market rally, says former Merrill economist David Rosenberg, who’s now chief economist and strategist at Gluskin Sheff up in Toronto.

Rosenberg sees similarities between today and late 2001, early 2002, when the recession ended but the recovery was aborted until the second half of 2003. “Asset deflation and credit contraction cycles never play out according to the historical script, which is one reason why we remain cautious and not at all trusting over the durability of this market bounce of the last two months,” he writes.

A retesting phase is coming, he says, though he’s no longer sure it’ll take the market back to the March lows.

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