Things were looking up for the stock market so far this year. The Dow Jones Industrial Average was having a relatively good first week of the year. Ma...
Things were looking up for the stock market so far this year. The Dow Jones Industrial Average was having a relatively good first week of the year. Many market analyst and commentators were telling us that the November lows were the market bottom. And then,
bang, the Dow Jones collapses 245.4 points yesterday, wiping out all of 2009's gains to date. In fact, the Dow Jones is now down 7.0 points for the year.
What happened? I call it a reality check.
Yes, during the panic days of October and November 2008 the stock market became severely oversold. At that time, I suggested my readers consider putting 25% of their available investment cash into the stock market. As the market internals improved (selling pressure declined, stocks hitting new 52-week lows declined, dividend yields became attractive), the stock market started riding the wall of worry up, again.
This leads us to the two popular schools of thought on the stock market right now. And I'd like to introduce a third.
The first theory has it that we are in a classical bear market trap, where stocks will rise from their November lows, bring investors into the stock market once more, and then the market will collapse -- basically, 1929-1931 all over again. I don't buy this theory simply because it is the most common prediction out there and the stock market, from my experience, never does what is expected of it.
The second school of thought has the market lows of November being set, the stock market having discounted the worst for the economy and higher stock prices are all that remain ahead. This theory has it that a strong stock market correction has happened and is now over, and the stock market will slowly rise as its internals improve. I don't buy this simplistic thought pattern, as I don't believe it is that simple either.
Now here's my theory. In October and November 2008, the stock market, as a six-month to 12-month leading indicator, foresaw the terrible economy of 2009. Investors and funds panicked, fear set in, and the stock market had a mini collapse. (After all, the Dow Jones Industrial Average was down a huge 35% in 2008.)
The market started 2009 out fairly well, giving investors the feeling that the worst was behind us. Yesterday, the bear, in a sole day, took away all of 2009's stock market gains -- a reminder to us all that this is still a bear market.
From here, the stock market, being most concerned with corporate profits, will be looking for clues if the unprecedented efforts of the Fed to increase liquidity will have the needed effect on the economy to bolster corporate profits. There is no doubt that a cleansing has happened in corporate America to make companies efficient once again.
But before we can call November 2008 the bottom for stocks, we need to see money coming in and some buying of stocks and that simply isn't happening yet. On the other hand, testing the November 2008 lows is something very few analysts are predicting these days...and you know how the market has a habit of doing what is least expected of it.
Profit Confidential
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