Stock Market: Are the
Good Old Times Back?

What a day for the stock market Wednesday! The Dow Jones Industrial Average has come within only 41 points of its post-crash high set in February of this year. The Russell 2000 Index of small stocks sits at its highest level since October 2007. The S&P 500 will close out the first quarter of this year today with its biggest first-quarter rally in 11 years! The good old times are back? Not really.What a day for the stock market Wednesday!

The Dow Jones Industrial Average has come within only 41 points of its post-crash high set in February of this year. The Russell 2000 Index of small stocks sits at its highest level since October 2007. The S&P 500 will close out the first quarter of this year today with its biggest first-quarter rally in 11 years!

The good old times are back? Not really.

This bear market has been doing exactly what I have said it would do all along: giving people the feeling that all is good with the economy, making them feel that the stock market is a safe place to invest again, and luring investors back into stocks. This bear market has done a masterful—absolutely masterful job—at executing this plan.

If we really think about it, the stock market has shrugged off rising long-term interest rates and the Japan earthquake crisis. It’s almost like there is nothing stopping this bear market rally.

So will the Dow Jones move to new record high above its 12,391 post-crash high? Of course it will; that’s what bear markets do: they move stock prices higher. But the real question is: will the Dow Jones move above its all-time high of 14,164 set in October 2007? Let’s put it this way: I’ll eat hay if it does.

I would say that over 90% of the people following the stock market have no idea that this is a bear market rally. The Internet and the business newspapers all have the same story today: Stocks rose sharply Wednesday because ADP Employer Services said the U.S. economy added 201,000 jobs this month.

That’s not why stock prices rose, not at all. Eight million Americans lost their jobs during the recession. Millions of people are no longer included in the official government unemployment stats. The unemployment numbers that the government will announce tomorrow do not reflect the real unemployment situation in this country, because the statistics do not take into consideration people who have stopped looking for work.

Stocks are rising because that’s what stocks do in a bear market rally, hence why it’s called a bear market “rally;” often also referred to as a “sucker’s rally.”

Michael’s Personal Notes:

I received more feedback from my article yesterday, “1934-1937 vs. 2008-2011: The Striking Similarity,” than any other piece I have written this year. I obviously have many readers who are as concerned about our economic future as I am.

So, how did it work out? What happened to the stock market after the bear market rally of 1934 to 1937 (which I compared to today’s bear market rally) was over?

That bear market rally ended in August of 1937. From there, the Dow Jones Industrial Average declined in value for five years. By 1942, the Dow Jones had fallen 50% from the peak of the 1937 bear market rally. If the same thing were to happen today, if history were to repeat itself, the Dow Jones would fall below its March 2009 low of 6,440.

Where the Market Stands: Where it’s Headed:

Since March of 2009, I have been saying that we are in a bear market rally that will take stocks higher. In December 2010, I changed my tune to state that in the “immediate term” the bear market rally will continue to raise the price of stocks, but I was turning short- and long-term bearish. That tune has remained unchanged.

For the benefit of my new readers, I define “immediate term” as now to six months out. I define “short-term” as six to 12 months out.

What He Said:

“Bonds could now be a buy: Bonds rise in price when interest rates fall, as their return makes them more valuable. After a bear market in bonds that has lasted for months, the action in the bond market, as I read it, indicates that the bear market in bonds could be over. I’ve always preferred quality when buying bonds, going with government bonds over corporate bonds. If you have some cash lying around, bonds could be a great deal.” Michael Lombardi in PROFIT CONFIDENTIAL, July 24, 2006. Government bonds were one of the best-performing investments from mid-2006 to late 2008, because they rose in price sharply as the Fed brought interest rates back down to one percent in October 2008.