Market Instability is a Huge Warning Sign

A quick update this morning folks.

Stocks shot out of the gates like a rocket this morning, but I don't buy it for a second. We had major market dislocations last night and this morning.

Stocks are up today because Gustav did basically zero damage to the oil rigs. Oil plunged as a result. Its down almost $9 a barrel on the Gustav news. Gold then followed suit dropping a whopping $35 to fall below $800 an ounce. These are huge moves folks.

The third jolt to stocks is the continued rumor that Lehman is close to a deal on new financing from a private Korean bank. Adding to the bullish sentiment on Wall St. was the fact that Australia cut rates and Great Britian came out with their own stimulus plan on real estate taxes.

So what did the traders do in reaction to all of this news? They piled right into equities and boom we are off to the races.

Here is the problem for the bulls

Bloomberg reported today that stocks are now at 25.8 times profit. Socks haven't bee this expensive since 2002. The last time this happened, the S&P dropped 38%. Here is the piece from Bloomberg:

Sept. 2 (Bloomberg) -- The best already may be over for the U.S. stock market this year.
The Standard & Poor's 500 Index, which had the worst first half since 2002, added 0.2 percent this quarter, the only gain among the world's 10 biggest markets in dollar terms. Shares in the benchmark index for American equity climbed to an average 25.8 times reported profits, the highest valuation in five years. The last time that happened, the S&P 500 fell 38 percent.

Money managers at Federated Investors Inc., Russell Investments and Morgan Asset Management, which oversee a combined $600 billion, said the gains won't last because corporate profits will fail to meet analysts' estimates. Wall Street forecasters, who were too optimistic about earnings for the past four quarters, predict income at America's biggest companies will grow by a record 62 percent in the final three months of 2008, according to data compiled by S&P.

``The market is pricing in the expectation of a good quarter, but we just don't see it,'' said Philip Orlando, who helps manage $350 billion as chief equity market strategist at Federated in New York. ``The fundamentals are going to be poor, earnings are going to be bad, and there are going to be more huge writedowns. We think stocks probably need to work 5 to 10 percent lower over the next month or two.''

Final Take:

Don't be fooled by this bounce. The bears were whacked over the head with a perfect storm of bullish news. Stocks are NOT cheap at these levels. This is a Gustav/oil relief rally. It will flame out shortly once the attention is focused back to the credit crunch.

I see desperation in the bulls eyes as they pump this bounce. I had to turn off bubblevision. It was simply too disgusting to watch the pump monkeys pump stocks based on zero fundamentals. The market is not rational right now people. Gold should not be dropping $35 in one day. There are major market dislocations out there.

Speculators are taking on huge risk and placing huge bets in commodities markets long or short. This will eventually end ugly. The instability I am seeing in the markets is of great concern to me.

Buyer beware. Lets see where we end up at the end of the day.