The” Second Round of Pain”

Posted by Dan Denning via the Daily Reckoning

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02/09/10 Melbourne, Australia

If you’ve been thinking about reducing exposure to stocks, now might be a good time. And if you’ve been thinking about increasing your exposure to precious metals, now might be a good time.

According to Morgan Stanley economist Gerard Minack, the stock market is in for a correction after its 9-month “relief rally.” In a note to clients Minack wrote, “We see the rise from March 2009 as a typical relief rally that follows major bear markets. Those relief rallies can occur regardless of underlying macro conditions, regardless of liquidity conditions and – most importantly – regardless of what happens next… We think risk assets have swung to pricing a better outlook than is likely.”

Minack says that a 25% correction is now in order. To be fair though, he doesn’t think the market will make new lows after that, only that it’s gotten way ahead of itself at these levels. The Grand Old Man of Dow Theory, Richard Russell, is even more direct. He’s predicting a “second round of pain” for stock markets. “I note that most analysts are now bullish,” he observes, “and that they are recommending stocks for the ‘continuing advance.’ At the same time, most economists are optimistic, arguing that the ‘longest recession since World War II has ended.’

“Typical,” Russell gripes, “last March everyone was bearish and the market was establishing a temporary bottom. Now that everyone is optimistic, the stock market is topping out and the public (the amateurs) are about to receive their second round of pain.”

What to do?

…read “what” HERE


Dan Denning is the author of 2005’s best-selling The Bull Hunter. A specialist in small-cap stocks, Dan draws on his network of global contacts from his base in Melbourne, Australia, and is a frequent contributor to The Daily Reckoning Australia .

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