Up, Up, and Away. But Why and For How Long?
Thursday, April 6th, 2006
By Michael Lombardi, MBA for Profit Confidential
At the time of this writing, the Dow Jones Industrial Average, after moving up steadily over the past couple of months, is only 4% away from its record high. Other major market indices have already reached record highs and even the NASDAQ is back to life.
I’m looking at four different economic barometers right now that signal stock prices should not be rising:
Gold: The metal continues to post 20-plus-year highs. Gold doesn’t rise because Michael Lombardi says it’s going to rise. it rises for a reason. With gold at about $600 U.S. an ounce, up from about $250 U.S. an ounce not too long ago–the gold market is telling us something. Historically, when gold has risen it has been a sign of inflation ahead, economic trouble ahead or a weak U.S. currency.
U.S. Dollar: Talking about the U.S. dollar, with the amount of debt our federal and state governments have accumulated, dollars will become a harder sell for foreigners. If it were not for the high interest rates we have right now, the dollar may have already collapsed.
Interest Rates/Bonds: Talking about interest rates (which really dictate the direction of bonds), they have moved up faster than anytime I remember seeing. Stocks are not supposed to rise in price when interest rates rise 15 times in a row. Rising interest rates mean the U.S. deficit gets larger and American consumers have bigger monthly loan payments to make. Since 25% to 50% of U.S. home mortgages are variable rate, U.S. consumers are not buying homes aggressively as they were a couple of years ago.
Real Estate: And this finally takes me to real estate. From the statistics coming out, the real estate boom is over. In fact, in many cities where the boom ran wild, the fear is that the boom will turn bust. According the Mortgage Bankers Association, in five U.S. states, 20% of Adjustable Rate Mortgages are at least 30 days late in payment!
Here you have all the logical reasons why stocks should not be rising. But whoever said the stock market is logical? Yes, the market could be illogical in the short-term, but in the end there is always regression to the means. In other words, common sense (reality) will always set in.
My bottom line: I wouldn’t be buying U.S. big cap stocks. I’d be buying only small-cap, special situations where the companies issuing those stocks have a real up-shot. But I wouldn’t be shorting the general market either because you don’t short the trend. Finally, the only general market I see that should be making continuous new record highs is the S&P/TSX (the major Canadian market) because it’s rich in precious metals and oil stocks.
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Tags: Dow Jones Industrials, gold, U.S. Deficit, U.S. dollar
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
