U.S. Stocks To Recover?

Greg Mankiw notes that newsletter pessimism have reached the highest level since June 1994 and also notes that June 1994 was a very good time to buy (The great tech stock bubble started in 1995). Confirming this, my good friend Daniel Halvarsson's favorite indicator, bullish percent, also shows that stocks are oversold right now, with the bullish percent falling to 27, below the 30 threshold for oversold.

Thus, a short-term recovery in stocks after the 14% decline since May 19 seems likely soon. With the worries created by Fannie Mae's & Freddie Mac's problems and the collapse of IndyMac, stocks may fall on Monday and perhaps a few days more, but a temporary bottom and following rally nevertheless seem near. However, because stocks are still fundamentally overvalued and because the underlying economic fundamentals are deteriorating, this rally will likely be another sucker rally. And with money supply growth showing signs of decelerating and with virtually all of it going into bidding up commodity and other goods prices, this sucker rally will likely be weaker and shorter than the one that started in Mid-March.