Bear Market Rallies Are Like Drug Addicts

By | April 22, 2009

That said, I’ve seen this movie before and I know how it ends.

If the rally continues (BIG IF), the next leg is going to be characterized by mind-blowing moves higher from some of the ugliest stocks on earth.

You have to look at a bear market rally like you look at a drug addict.

The first phase is just intoxication, like the feeling one gets after a few beers down at the Regal Beagle Bar & Grill. The market equivalent of this is a move higher in the blue chips and mega-cap stocks. We saw that develop in mid-march.

Next, the rally extends to the rest of the large caps, some mid caps and the growth indexes in general get their upswing. This is like the addict switching from beers to tequila and then smoking a little weed out behind the bar with his cousin and the busboy.

Once the large and mid cap stocks have had their moves, the junkie looks to the smaller cap names and even some of the more distressed S&P stocks that sat out the beginning of the rally. The euphoria kicks in here, as this would be right around the time he ducks into the mens room to crush up a few pain pills and snort them off the sink.

Now, the addict is flying high, and the search begins for lower quality, damaged stocks and tertiary names in a given sector, as he thinks these could play catch up to their better-managed and bigger brethren companies. At this point, he is sitting in his car outside his ex-girlfriend’s house doing lines of cocaine off of CD cases.

The final stage of this junkie odyssey is right around now. This is where the manager or trader who was either too much in cash or worse, had too many shorts on, reaches for the real garbage to catch up. We saw the beginning of that this past week as Krispy Kreme (KKD), a company that has managed never to do anything right since its IPO 8 years ago, ran up 50% in one day on the fantastic news that their creditors would not, in fact, push them into bankruptcy. When you start to see the bankruptcy candidates and 90 cent stocks putting on 40 and 50% moves, you are looking at the equivalent of a drug addict sucking the nitrous gas out of a whipped cream canister, so desperate for that final high that he’ll pretty much try anything at the end of the night.

Unfortunately, I fear that this is the stage we are arriving at, if this rally continues in the coming week. I hope I’m wrong, but there were way to many monster moves from lousy companies at the tail-end of last week. I watched this go on after every major bear market rally in the early part of this decade and I learned how bad the hangover could be firsthand back then, too.

One need only take a gander at the top percentage advancer’s list during the next up day to determine whether or not I’m right. If the junk dominates the leader boards, you’ll know we’re closer to the hangover than the beginning of the buzz.

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