Stocks continue their seemingly unshakeable rise with the DJIA now within spitting distance of 10,000 having jumped over 1,500 points since early July.  While many analysts believe that this rally is for real and is to be expected coming out of a recession, a great many others are increasingly skeptical of the market’s ebullience.  Gluskin Sheff Chief Economist and Strategist David Rosenberg pointed out some rather grim facts today in his morning dispatch.

Rosenberg first posed the question “who is doing the buying?”  Frankly, finding a solid answer to that question is difficult.  While much credit has been given to retail investors for recent buying activity, the facts seem to dispute this assertion.  Stock mutual funds had net outflows of $1.33  billion last week while $8.2 billion poured into bond funds.  This seems to indicate that the retail investor—usually regarded as more of a contrarian indicator—is not aggressively buying stocks.  Corporate insiders are selling aggressively at present, thus the “smart money” is certainly not in the bullish camp.  Finally, corporate stock buybacks are down 72% from their year-ago levels and are the lowest in recorded history—totaling only $24.4 billion in the second quarter.

Rosenberg concludes:  “So who is doing the buying?  Very likely it is still a combination of program trading, short coverings and portfolio managers desperately trying to make up for last year’s epic losses.”  Such buyers are seldom if ever the cause a major bull market.  This lends credence to analysts who believe that we are merely in the late stages of what has been a very intense bear market rally.

Rosenberg goes on to point out that it is unprecedented for the S&P 500 to rally 60% off its low in only six months, particularly during a period which saw 2.5 million job losses.  Post-recession market rallies are to be expected, but a normal bounce is 20% from the trough to the recession’s end.  Most post-recession bull markets don’t see 60% upside until the recovery is three years underway.  Frankly, we are still seeing pretty energetic debate as to whether or not the recession is even over.

David Rosenberg is one of many thoughtful strategists at the present time who remains perplexed by and very suspicious of the recent bull run in stocks.  Given the extreme uncertainty facing U.S. investors regarding future fiscal and tax policy, the still-very-frail nature of our financial system, the high likelihood of a anemic pick-up in employment and continued woes in many residential and commercial real estate markets, it is hard to see how equities can hold their current valuations indefinitely, let alone continue to rise.

Bull markets normally see the market climb a “wall of worry”.  The pervasive worry extent in the investment community today gives some bulls solace that there is plenty more upside ahead.  However, we are clearly in uncharted territory at the present time and investors would do well to seriously contemplate who is buying right now before aggressively joining their ranks.

The Great Wall of Worry