Incredibly we have seen the stock market rebound in the past week in response to the Federal Reserve monetary stimulus and the government’s fiscal stimulus.

But there are several characteristics about this market rally that are troubling.

1) The volume of shares being traded is way down. Not only that, the market index is being influenced by a smaller number of companies than perhaps at any time in history.

Let’s talk about what thin trading volume means in this context. It means that after the major selloff, there are not that many people looking to execute trades in the market. So a smaller number of buyers or sellers can significantly influence the price of a stock. The prices have gone up in the past week, but the buying sentiment is not broadly based, its very narrowly based. That means its quite fragile. A similar sized sell-off could easily crater prices.

2) Let’s talk about patterns of investing. I’m one of these folks who believes in investing on the basis of fundamentals. There is another school of investing called technical. That’s when you speculate on market timing and market psychology. Terms like bull market and bear market come from the world of technical analysis, where traders aim to time the market. Many analysts are calling this a bear market rally that is a precursor to the big drop. 

3) Warren Buffet spoke about a week ago to the shareholders of Berkshire Hathaway. In his remarks, there were three items worth noting.

He is divesting if stocks including airline stocks. He is saying that it’s going to be a number of years before the airline industry recovers. After all, he is 89 years old and he likely won’t be alive to see the full recovery in the airline industry.

In the last downturn Warren Buffet was active in doing deals. For example, helped GE with a line of credit to ensure they had liquidity if they needed it. Today, he’s divesting of certain assets and is holding onto a record amount of cash. He isn’t making the same kind of bullish statements that we heard back in 2008 and 2009.

The Buffet indicator measures the total market cap (TMC) relative to the US GNP. If valuations are going up, and the economy isn’t growing, then the index goes up.

Let’s talk about why the stock market matters. Some people in the press are saying that the stock market is not the economy. That’s absolutely true. It’s as if to say that stock values can drop and it’s only a few wealthy investors who are going to have a smaller cash pile at the end of the day. Big deal. That’s not affecting main street.

Well folks, this is where the connected nature of our world is virtually impossible to escape. You see we have tens of millions of baby boomers who are nearing retirement, or have recently entered into retirement.

Guess where those retirement funds are highly concentrated? That’s right, the stock market. It’s in mutual funds. It’s in pension plans. While I don’t advocate the stock market as a place to invest right now. In fact I have been recommending against it for about 5 years.

When you’re dealing with people who are in their 30’s, they have plenty of time to recover from an investment setback such as we are experiencing right now. But if an investor is in their 60’s or 70’s, they simply don’t have the time to hope they can make it back. If they’re incurring losses, these losses are likely permanent.

The focus has been on job losses in the employment economy. Let’s not forget that the scope of the pain is going to extend far beyond the immediate. If retirees suddenly lose 30%, or 50% of their retirement savings because of a stock market crash, their spending power has been diminished for decades to come.