Lucky 13 and What It Has to Do with the Stock Market

by Michael Lombardi, CFP, MBA

As I sit down this morning to write this column, the Dow Jones Industrial Average, likely the most widely followed stock market index in the world, sits a paltry 13 points away from turning positive for 2009.

Last week, several well-known market analysts came out and declared that a new bull market is upon us. If I look at the split between the bulls and the bears today, the majority of market commentators and analysts are in the camp that the worst is behind us for stocks and the economy. Only a small handful of them sit in my camp — those who believe that stocks will eventually test the lows they achieved on March 9, 2009.

Here are some important numbers I want my readers to be aware of:

In 2007, the bull market peaked when the Dow Jones Industrial Average hit an all-time high of 14,164. In March of this year, the Dow Jones hit a multi-year low of 6,440. Hence, from its high to its low, the Dow Jones lost 7,724 points. Please follow me.

When I look at severe bear markets going back to the beginning of the 1900s, after stocks fall perceptually into a bear market, a rally develops, whereby one-third to one-half of the loss is recovered before stocks move down again. Now let’s translate that into today’s market.

At the very minimum, if the current market rally recovers one-third of its loss to date, the Dow Jones Industrial Average would be trading at 8,988. If the current market rally recovers one-half of its loss, the Dow Jones Industrial Average would be trading at 10,302. Today, the Dow Jones trades at only 8,763. Hence, as they say in technical analysis, this market rally still has legs, plenty of them.

When I focus on the Dow Jones Industrial Average in my writings here at PROFIT CONFIDENTIAL, I do so because I see the Dow Jones as a leading indicator for the economy. Personally, I have never been a fan of big-cap stocks and have always preferred small-cap, penny stock or even micro-cap stocks for the biggest bang for my buck. It is every important to note that, if the Dow Jones is rising, the smaller-cap stocks are rising at a quicker pace. If the Dow Jones is falling, the small cap stocks are usually flat. Why? As silly as it sounds: because the action of the Dow Jones Industrial Average sets the mood of the market and the small cap stocks follow that mood for direction.

Michael’s Personal Notes:

Our company produces and sells investment newsletters. That’s what we do and that’s what we have been doing since 1986. From the sale of our newsletters, I use a somewhat unorthodox indicator to tell me where various investments will eventually move (i.e. higher or lower in price).

Through the years, I have noticed that, when a particular investment letter is not selling well, this is an indicator that the public is not interested in that investment letter’s topic. Being a contrarian thinker and believer that the investing public is usually wrong, if the public is avoiding one form or type of investment, that investment usually does well.

And that brings me to this observation: We publish 37 different newsletters. Sales are brisk right across the board. But we have difficulty selling only one newsletter: our gold stock newsletter. Since 2002, I’ve been telling anyone who would listen to buy gold stocks. Despite gold bullion tripling in price since then, I still can’t get people to buy our gold stock newsletter. What does this tell me? Gold prices will rise substantially higher.

What He Said:

“In 2008, I believe investors will fare better invested in T-Bills as opposed to the stock market… I’m bearish on the general stock market for three main reasons: Firstly, borrowing money in 2008 will be more difficult for consumers… Consumer spending in the U.S. is drying up, which will push down corporate profits.” Michael Lombardi in PROFIT CONFIDENTIAL, January 10, 2008. The year 2008 ended up being one of the worst years for the stock market since the 1930s.