I am calling it a Lazarus rally because each time it should end it rises up again. But sooner or later it will eventually run out of steam and the next big down leg will start.  We are coming up on the anniversary of last years crash which could cause a bit of nervousness in the market.

It is two weeks since my last post and in that time the market has risen to a close on Friday of 4918 points, some 240 points higher than what I thought would be the top. It seems determined to make the psychological resistance of 5,000. However both the S&P500 and the DJIA had a down day on Friday.  This was too small to signal a change in sentiment at this stage, we would need to see some follow through this coming week.  Another factor is that Monday is the last trading day for the month.  Mutual funds and hedge funds like to be able to report positive figures for the month.  Will rationality return to the market?

John Mauldin’s e-letter this week is about Uncomfortable choices.  The US has now got its self into the position where some uncomfortable choices will have to be made.  The past decisions of taking the easy way out have now led to the situation where they have “painted themselves into a corner” and steps will have to be taken that will ruin the “recovery”.

Richard Russell of Dow Theory fame wrote this week about how the US national debt is now over $11 trillion dollars with an interest bill of $340 billion which is at an interest rate of about 3.04%.  The Obama administration admits that they will add $9 trillion to the national debt over the next 10 years, bringing the total to 20 trillion dollars.  If interest rates remained at today’s low level it would still mean an interest bill of 618 billion dollars in a year, around 1.7 billion dollars every single day.  He says, and I agree, that no nation can hold up in the face of these kind of expenses. Either the dollar will collapse or interest rates will go through the roof.

The choices that will have to be taken at some stage will cause pain and anger, and changes of government.  It is the politicians need to hold onto power by keeping the voters happy that will delay any action to the last possible minute.  Just think of the problems California is having.

I have given up predicting when the rally will end, but one thing is clear: just as an individual can not indefinitely live beyond their means, neither can a country.  Sooner or later the punch bowl will be removed. John Mauldin is predicting another recession and he reminds us that in a recession the market drops by 40%. He did say his past history is of calling recessions early, but they still come. So make sure you can exit quickly if you go/are long.