The rally which has gone on since the middle of July has got well ahead of the “recovery” such as it is.  I am sure it has sucked in many small investors, who having lost money in the crash last September-October, have re-entered the market, not wanting to miss the boat.  Now I fear they are about to lose again, as the market heads lower.  The reasons I make this comment are many, and I will try to cover the main ones below.  But first the chart.

The FTSE hit resistance with a double top at 4778 and 4776 on Thursday and Friday (September Futures).  This combined with the news out of the US this week could signal that this rally has come to an end and the market could be heading for another test of the March lows. This last leg of the rally has been all about “signs of recovery” (green shoots), and much tinkering with the statistics to give a rosy view.  Historically markets have often dropped in September and October including the 1929, 1989, 2001, 2008 crashes – and so the market is usually either quiet or slightly down or strongly down on these anniversaries. Given what I write below the markets have no justification to rise further.

HOUSING: Much was made about the rise in home sales, but a look at the actual numbers is not pretty. The market is divided between sales of foreclosed homes (damaged 26%, move-in ready 23%) short sales 14% (price lowered to achieve a quick sale) and only 36% for a non-distressed sale.  Foreclosures are increasing! Last Month (July) saw a record number of 360,149 properties that received a default of auction notice or were seized.  Next year will be the peak for Adjustable Rate Mortgages resets to higher interest rates so we cannot expect an improvment in the real housing market for at least another year, if then.

BANKS: Another 5 banks hit the wall, bringing the total to 77 for the year.  I read a while back that before this is all over as many as 1,000 banks could hit the wall.  With the increase in foreclosures above it is continuing to affect bank profits and will do for some time. One way some banks are making a profit is borrowing from the FED at near to zero interest, then buying treasuries from the FED with that money and earning 3.75%. Just another way of supporting the banks and making it seem like there is a strong demand for Treasuries.

Unemployment: Perhaps the biggest con of all. As mentioned last week it is a puzzle as to how unemployment can drop (percentage wise) when non-farm payrolls was minus 247,000 jobs for July. I find there is an official class called U-6. This counts all those not counted in the official figure. Those who have given up looking for work, or are employed part-time but want full time employment.  There are 2.3 million in the U-6 class. The loss of jobs since this recession started (8 million) has wiped out all the jobs created since the 2001 recession.  With the population increase in the US there needs to be 150,000 jobs created each month just to keep unemployment stable. So it does not take a genius to see that there is a long long way to go to recover the 8 million jobs lost plus the 150,000 per month needed to cover the increase in population.

CONSUMER CONFIDENCE: On Friday the University of Michigan released its consumer confidence figure.  It came in at 63.2 when the market was expecting 69-70.  Notice is taken of this figure because it is produced outside of the government, and is not subject to “seasonal adjustments”. Consumers are battered and bruised. Many have lost their houses or jobs, or both. Or they are in fear of loosing their houses or jobs, or both.  The mood is not good, they are saving frantically, paying down debt. Even with the “cash for clunkers” in full swing, retail sales were down.  Consumers are not spending which will have consequences further down the track.

So you can see from the above there was no good reason for the market to rally to the hights it has achieved.  The insiders have started to sell shares and there is a good reason for this. However I remind myself that the market can remain irrational longer than I can remain solvent if I insist on arguing with it.