Big Day for the Stock Market

by Michael Lombardi, CFP

Yesterday was a big day for the stock market. The Dow Jones Industrial Average, which was the only stock market index that had failed to cross the line into solidly positive territory for 2009, decisively broke to a new high for 2009.

The Dow Jones is now up 38.5% from the intraday low the index reached on March 9, 2009. Since March, the stock market has been trying to rally higher, but failed on several occasions. Seasoned readers of this e-newsletter have read my calls since March for the Dow Jones to regain between one-third and one-half of its loss experienced from its all-time high set in October 2007 to its multi-year low reach in March 2009.

In late June and early July, the bear market rally (as I have been calling it), which started in March 2009, lost its momentum. Our own technical analysts became concerned and were calling for a correction of at least five percent. Now, with the Dow Jones moving to a new high for 2009, the rally is back in gear.

There are two schools of thought at this point in time on the stock market:

The first group believes that a new bull market is upon us gratis to unprecedented economic stimulus and monetary accommodation. In other words, the government has done a great job turning the economy around. The worst is behind us, as proven by much better than expected second-  quarter earnings reports from large U.S. corporations.

The second and smaller group, which I belong in, believes that we are experiencing a rally in the confines of an overall bear market. This group believes that stocks are rebounding for a devastating decline that started in 2007, accelerated in 2008, and which ended on March 9, 2009. Simply, stocks became too oversold too fast and the market is rebounding from its rapid decline. Remember, nothing goes up or down in a straight line.

In respect to valuations, according to bigcharts.com, the Dow Jones Industrial Average is trading at over 50 times earnings and at a dividend yield of 2.99% — not cheap by any stretch of the imagination.

However you look at the current rally that started in March of this year, investors need to bask in it and make money from it. In the 23 years we have been publishing investment newsletters, our stable of writers is delivering its biggest winning streak of profits I have ever seen. Enjoy the rally while it lasts.

Michael’s Personal Notes:

If you have been following the story of CIT Group Inc., a major lender to almost a million small businesses, you are aware that the government turned down CIT for an emergency financial lifeline. Should the deal CIT has reached with private lenders go through, this will be the first time in this economic crisis that private money has come to the rescue of a large financial institution — a significantly important step forward in the re-establishment of confidence in the economy.

Where the Market Stands:

The Dow Jones Industrial Average is now up 1.6% for the year, not a big percentage, but nonetheless very important to the psychology of investors, as the Dow Jones is the last major stock market index to turn positive for 2009. Hence, we now have all the major markets, including the S&P500 and NASDAQ, up for 2009. In my opinion, after faltering four weeks ago, the bear market rally is back on its path.

What He Said:

“Many of today’s consumers have purchased properties with very little down payment. They’ve been enticed by nothing-down, interest-only, second and third mortgages. Bottom line: the lower-interest-rate environment sucked consumers into the housing market big-time. And that will eventually cause us all problems.” Michael Lombardi in PROFIT CONFIDENTIAL, June 22, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.