What’s Really Going on with the Stock Market Today?

Have you heard the news?:

— The U.S. lost 84,000 jobs in August and the unemployment rate rose to a five-year high.

— Foreclosures of U.S. homes rose to a new 29-year high in the second quarter of 2008.

— The Federal government, after bailing out Bear Sterns this summer, announced this weekend that it will rescue mortgage giants Freddie Mac and Fannie Mae.

— Wall Street firms have written off over $100 billion in non- performing assets.

— More than 10 U.S. banks have now gone under in the aftermath of the subprime problem. Many mortgage companies have closed their doors and many homebuilders are going bankrupt.

Regardless of all the above, and despite calls that the current credit and housing crisis is the worst we have seen since the Great Depression, the stock market has failed to go down big.

As of Friday night’s close, the Dow Jones Industrial Average is up two percent from its July low of 10,731. This morning, in response to the government announcement of its action to bail out Freddie Mac and Fannie Mae, the Dow Jones is rallying by more than 200 points. If this rally holds for the day, the Dow Jones will close Monday up more than four percent from its July low.

So, why, in the midst of the financial havoc American is currently experiencing, is the world’s most watched index failing to fall? I don’t have an answer…and I doubt anyone has the answer. But the “why” is not as important as the “what” in this case. And “what” the market is saying is that it sees a future brighter than the pessimism currently circulating in the financial markets. We don’t have to know “why:” the market is performing like it does. But as investors we need to know “what” the market is telling us. Many great investors have made fortunes by following “what” the market does…the old “the trend is your friend” adage. Hence, I wouldn’t call this an all-out bear market until the July 2008 market lows are broken.