In light of the rally in the major U.S. stock market indices during the past two weeks, the Wall Street cheerleaders now act as if the downturn in stocks is over.
These financial "experts" also suggest that economic conditions in the U.S. will suddenly improve as a result of the Fed's 125 basis point cut in its target Fed funds rate.
However, any sensible person knows that an economy the size of the U.S. doesn't shift gears and head in a different direction merely because the Federal Reserve lowers the rate at which commercial banks can borrow funds from one another on an overnight basis.
So, what's really going on? Well, my research indicates that Wall Street investment-banking firms and mutual fund portfolio managers are up to their old tricks – they are trying to convince individual investors to continue adding funds to their equity portfolios even though those bankers and fund managers are well aware of the tumultuous state of the U.S. economy.
Just look at the chart below, which shows the degree of risk that large institutional investors have been willing to take since October of last year.
As you can see in the chart, institutional investors have become much more risk-adverse since October of last year, as the State Street Institutional Index has fallen to below 70, from around 100 during August 2007.
As I mentioned in a couple of articles last week, numerous fundamental developments suggest that economic conditions in the U.S. are worsening and that stock prices in general are headed lower over the coming months.
Meanwhile, several technical indicators suggest that the recent rebound in stock prices will be short-lived. So, rather than thinking that the recent rally in the major stock market indices is indicative of further stock advances, I suggest that you pay more attention to the number of stocks that have been advancing in price versus those that have been declining. That is detailed see the chart below.
As you can see, significantly more stocks have been declining in price during the past few months than have been advancing.
So, I urge you to not get sucked into believing that stock prices have reached a bottom and that economic conditions will improve in any significant way over the near-term. If you'd like to learn more about my analysis of the financial markets and how to profit during the current bear market, Click here now .
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