In his most recent Wellington Letter (Aug 31, 2009) Bert Dohmen, of Dohmen Capital Research Institute, warns that the current stock market rally is done and money flows will start moving from stocks to safety. Note that when we talk rally here, we are not just talking about the US stock market rally, but the globaly rally, including China and other emerging markets.

“Our work strongly suggests that the rally is now very close to being done. The risk/reward of owning stocks right now is unfavorable”

Mr. Dohmen continues:

With bullish sentiment at an extreme again, money flow can only go in one direction, from stocks to safety. And that’s already happening in china. The emerging markets will be very vulnerable as well.

Mr. Dohmen cites several reasons, including the extreme bullishness trend above. Here are some other factors at play, pointed out in the Wellington Letter:

• Chinese government is withdrawing stimulus and the speculators are rushing to the exits.
• The Chinese market has been more speculative and more overvalued this year than at the top in 2007
• There will be a global surplus of commodities once China stops buying.
• Chinese stock market is up 80% while corporate profits in China are down 30%. (dohmen asks, “Is that a bubble?”)
• Trade is plunging at depressionary speeds
• US Credit market debt is 375% of GDP

Bert Dohmen does some excellent analysis on global economies and financial markets. His Wellington Letter is publised twice a month and delivered in online format.

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