A dead cat bounce?

The latest rally in the equity markets has been quite frustrating for me, but I am positive of going short further. Firstly, I was expecting Citi to be nationalized this time around after its stock price fell below $1. Then, Mr. Pandit announced that the bank is profitable followed by similar announcements by Bank of America. The market has rallied thereafter for 9 consecutive sessions. Inspite of the Fed's braveheart efforts to buy governments bonds, this is a bear market rally and there is more pain to be seen. I closed some of my short positions, but I am definitely holding on to others to see new lows. Nouriel Roubini has an interesting article on the "dead cat bounce":

Reflections on the latest dead cat bounce or bear market sucker’s rally

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Nouriel Roubini | Mar 14, 2009

It is déjà vu all over again. We have already seen this Groundhog Day movie at least six times over and over again in the last year or so: the market starts to rally – this time around about 8% in a week - and the chorus of optimists starts to say that this is the bottom of the economic and financial crisis and that we are at the beginning of a sustained stock market rally that signals the true end of this bear market.

Even before the latest bear market rally started last week I wrote the following on March 2^nd:

Of course you cannot rule out another bear market sucker’s rally in 2009, most likely in Q2 or Q3: the drivers of this rally will be the improvement in second derivatives of economic growth and activity in US and China that the policy stimulus will provide on a temporary basis: but after the effects of tax cut will fizzle out in late summer and after the shovel-ready infrastructure projects are done the policy stimulus will slack by Q4 as most infrastructure projects take year to be started let alone finished; similarly in China the fiscal stimulus will provide a fake boost to non-tradeable productive activities while the traded sector and manufacturing continues to contract. But given the severity of macro, household, financial firms and corporate imbalances in the US and around the world this Q2 or Q3 sucker’s market rally will fizzle out later in the year like the previous 5 ones in the last 12 months.

And, as we pointed out here on March 9^th:

I have also argued that another bear market rally may occur some time in Q2 or Q3 of this year and may end up like the previous six. Indeed in the last 12-18 every time something dramatic happens (that leads to a lower stock market low) and the government reacts to it with a more aggressive policy action optimists come out and say that this is the dramatic and cathartic event that suggests that a bottom has been reached: they said that after Bear Stearns, after the collapse and rescue of Fannie and Freddie, after Lehman, after AIG, after the TARP was announced, after the G7 communique’, after the $800 fiscal stimulus package was announced last November (the onset of the latest sucker’s rally).

And after a while markets are again “shocked shocked” (to paraphrase the French police inspector in Casablanca) to discover that the macro news are much worse than expected in the US and abroad, that earnings news are much worse than expected not just for financials, realtors, home builders and consumer discretionary firms but also for most other non-financial firms, and that financial markets/firms shocks/news are worse than expected.

And indeed, as predicted, in the last week another bear market rally has started in earnest; the latest rally is just a dead cat bounce. Let us explain next in much detail why this is another bear market rally…