Most hated and unbearable rally

The rally since March 2009 low had many skeptics worrying from the start.

According to them, a "true" bear bottom is not usually featured by a short and shape rally like what we've seen since the March low.

Historically, the ultimate "capitulation" is met with loss of faith and utter disgust in stock investment as the conventional wisdom of achieving long term return is thrown out of the window.

However, the market kept on proving them wrong. Really? We will have a "V" shape recovery after a perceived worse than the 1930's great depression many feared towards the end of Decemeber 2009 after Lehamn failure.

A closer look at the cause of the financial crisis in 2007 and what the government and central banks around world has done in response to this crisis will perhaps provide the answer.

The root of the cause is the availability of cheap debt for a prolonged period of time.

I didn't know much about history before 1983 personally. So starting at 2001, Fed Chairman Alan Greenspan slashed the Fed funding rate to 1% in wake of September 11 terrorist attack.

Around that time, the economy perhaps had just came out the recession and was in a fragile state. Greenspan tried to use low interest rate to entice a re-ignite in economic activity.

he succeeded in a sense that the ultra low interest rate encourage lending and business activities. However he kept the rate too low for too long. He didn't increase the Fed fund rate until 2004.

A low interest rate environment effectively increased you capacity to borrow money. Such low interest rate also encouraged growing loose lending standards as the risk of defaulting will also be suppressed.

Cheap debt manifests its way into the markets and created an amazing impact. It managed to prop up almost every single asset class in nominal terms except for one asset i.e. the US dollar.

House price, bond price, stock prices, commodities, art etc all boomed from 2002 to 2007 at an incredible pace yet unsustainable.

It is not surprising to see that because excess supply of money/credit drives down the value of the currency. Many assets in the world are denominated in US dollar. So when US dollar went down, the nominal price of the asset goes up.

Of course, nothing kept on going in one direction without a pause. The question is when and how big the correction will be. It turned out the pause was gigantic and caused significant stir in the financial markets while the US dollar strengthened during the period but not enough to arrest its downward spiral.

Perhaps the best reflection of US dollar strength, or weakness for that matter is gold price. Gold made its low in 2002 at US250 and increased more than 4 fold to US1060 recently. It coincide with a consistent dollar slide from 2002. Coincidence? Not so much.

Back to now, the fact is that S&P 500 has rallied more than 50% since March 2009 low. Many hated this rally as many investors sat on the sidelone watched the market going up. The higher the market rises, the more skepticism grows. It is very difficult to watch such a spectacular run in the market and not be part of it.

Here is the thing.

If you don't believe this market rally as the beginning of a sustained recovery, then there is little to worry about a 9 monthly rally. If you span the chart of Dow, it first reached the 10,000 mark back in 1999.

If you think you are too late to participate in this rally, I think you are probably right. Getting into the market when it is running hot is never good economics.

However, the fundamental human nature (greed and fear) will ensure that your time will come sooner or later. Be patient. When your time comes, make the most of it.

As mentioned previously, nothing goes in one direction indefinitely. The rally since March 2009 will end. The question is when and how big.