Falling in Love with the Sucker Rally

  • Share
  • Read Later

The market rise of the last two weeks has been described as a "sucker" or a bear market rally. One means about the same as the other. The premise is that the long term trend of the indexes is down. Once in awhile, investors will stir from their depressions to watch the dead cat bounce. In this case, the Dow is up 10% since March 9.

The last long rally the market had ran from March of 2003, when the DJIA was 7,740 to almost 14,100 in October 2007. An investor in an index fund doubled his money and did even better if dividends were factored in. No one calls the long leg up in the market a sucker rally, but it was for those who did not sell their stocks until early this month when the Dow dropped below 6,600. (See pictures of the Top 10 scared traders.)

What defines a sucker rally is simply a matter of perspective, and, more importantly, when investors buy and sell. Someone with the fortitude or foresight to buy Citigroup (C) earlier this month at $1 would have had a return of two-and-a-half times in a matter of days. It is pointless to figure out what that would be on an annualized basis. Citi is not going to $5,000 in the next year, so doing the math doesn't matter. (See pictures of TIME's Wall Street covers.)

A well timed investment in GE (GE) could be worth a 71% return, also in less than a month. Sirius (SIRI) is up 7x from its low of $.05 which was set only a month ago. Even Apple (AAPL) has moved up 27% in a very short period of time. There really is not any such thing as a sucker rally. There are only suckers. In the long bull market that stretched over nearly four years, many investors who made five or six times their initial investment did not cash out in 2007. Some did not take even a small part of their gains and put them into CDs or yen futures. They just let the money ride which means that they assumed that the market was due to double again.

The last two weeks of explosive movement in the market will not continue. The market may have made a turn, and it may trade much higher in a year than it does now. But, a 10% return every two weeks is less probable than the Republic of Madagascar putting a man on the moon during the next decade.

People who give investment advice make their living getting other people to gamble their money away. These advisers want people to listen to predictions which could cause them to lose their life's savings. Owning a stock that is up by a factor of three or four times in less than a month is a blessing, perhaps not a celestial one, but it is a sign, at least, that fate has been kind. Even the most fabulously gifted investor in the world could not have predicted that Citigroup shares would rebound so far, so fast. (See the Top 10 TV feuds.)

Someone will sell Citigroup tomorrow, and someone else will hold it while it goes to $5 or back to $1.

Douglas A. McIntyre

See 25 people to blame for the financial crisis.

For constant business updates, go to 24/7wallst.com.