The Big Significance Behind Friday’s 200-Point Market Rally

stock market rally** Michael Lombardi is away on assignment today; his column will return Friday. **

The business and financial media, in general, did not pick up Friday’s significant 197.84-point rise in the Dow Jones Industrial Average. The world’s most popular stock market index just broke out on the top side of a trading range that had defined it since mid-May of 2010, and the popular media really didn’t focus on the event. That’s good for stock prices.

As I started writing a few weeks ago…

Compared to U.S. Treasuries, the yield and possible return on stocks all of a sudden are very attractive alternative investments again. Corporate earnings are up, the U.S. dollar is down and the Fed is ready to accommodate more: a perfect “before the storm” recipe for stock rallies. Here’s my question: could the stage be set any more perfectly for the rally in stocks that began in March of 2009?

Add in the huge negativity surrounding stocks and the economy today and you have a strong potion for higher stock prices. Yes, we all know that the rising deficit and falling U.S. dollar will eventually lead to higher interest rates and thus a weaker stock market. But for now, in the immediate term, stocks have many positives fueling their price appreciation.

Imagine for a minute the Dow Jones Industrial Average breaking above the 11,000 again for 2010 (which it likely will)…and watch as all of a sudden investors start to paying big-time attention to the stock market.

Should the bubble in U.S. Treasuries burst as I predict, cash will have only two possible alternatives to flock to: the stock market and gold. And guess what? Both will do spectacularly well for the remainder of 2010. The euro, real estate, and U.S. Treasuries paying no real return — they are all dead in the water for now.

Yes, we are about nine months into 2010, the year is closing in on us quickly, and the dire predictions of the naysayers and bears have not developed. Why? Because they are too early in their pessimism.

I’m big bear for 2011, unless the government stops spending and starts reducing its debt, the U.S. dollar stops its multi-year decline against other world currencies, and the unemployment rate starts to decline. Unfortunately, I don’t see any of these events occurring in 2011.

My dear reader; in the immediate term, enjoy the continuing rise in stock prices. Grab what you can get out of the market before it’s too late. I’m not afraid to ride the bear market rally higher, and neither should you be.

Michael’s Personal Notes:

I read some silly articles on popular financial web sites and business newspapers this weekend saying that the bull market in gold has the warning signs of a bubble on it. The articles stated that hedge funds are pouring money into gold and ETFs are putting money into gold at a pace that makes prices “vulnerable” if investors should bail on gold price weakness. I never heard something so ridiculous.

Sure, gold is up about 30% this year. Sure, gold has risen every year since 2002. Sure gold is up fivefold in less than a decade. But the bull market in gold bullion in nowhere near bubble status.

Do we forget the definition of a bubble? Remember the boom? Almost everyone I personally knew was buying Internet-related stocks. I remember being in a real estate closing and the real estate agent being busy on his phone buying Internet stocks. I remember taking a ride in Manhattan and the taxi driver telling me what Internet stocks to buy.

Remember the real estate boom that peaked in 2005? I would go to cocktail parties and my friends would tell me how many homes they owned. I recall a particular taxi driver in London, England, telling me that he owned three flats in London because “real estate prices only go up.”

Stop 100 people in the street of an upper or middle-class neighborhood today and ask home many of them own gold-related investments. You might get one person, maybe two, maximum three. The bull market in gold bullion is far from bubble status. In fact, the gold bullion bull market is only getting going now.

Yes, we will have gold price corrections on the way up. Always do with bull markets. But this baby has a long way to go, courtesy of a maimed U.S. dollar and a country beset by debt that clueless politicians continue to pile on.

Where the Market Stands:

The Dow Jones Industrial Average opens this morning up 4.1% for the year. The bear market rally that started in March 2009 remains intact.

What He Said:

“When property prices start coming down in North America, it won’t be a pretty sight, because consumers are too leveraged. When consumers have over-borrowed so much that they have no more room in their credit lines to borrow more, when institutions start to get tight on lending, demand for housing will decline and so will prices. It’s only a matter of logic, reality and time.” Michael Lombardi in PROFIT CONFIDENTIAL, June 23, 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.