The Stock Market: What’s
Really Happening with It

The facts are the facts. Since the crisis in Japan hit a week ago, the Dow Jones Industrial Average has fallen 3.2%. But if we look closer, we see that North American stock markets started declining back on February 18, 2011—that’s when the Dow Jones hit a new record high for the bear market rally. My opinion is that profit-taking was already underway. The earthquake in Japan accelerated the decline in stock prices not because of the damage to the Japanese economy, but for very different reasons.My take on what happens in the financial markets and what you hear from reporters and see in the media are two very different things. I guess you know that or otherwise you would not be reading my column.

The facts are the facts. Since the crisis in Japan hit a week ago, the Dow Jones Industrial Average has fallen 3.2%. But if we look closer, we see that North American stock markets started declining back on February 18, 2011—that’s when the Dow Jones hit a new record high for the bear market rally.

My opinion is that profit-taking (who can blame investors, stocks were up almost 100% since March 2009) was already underway. The earthquake in Japan accelerated the decline in stock prices not because of the damage to the Japanese economy, but for very different reasons:

The stock market has adjusted itself lower in the expectation that Japanese investors will pull funds out of North American stock markets and bond markets, as money is repatriated back to Japan to help pay for rebuilding the country’s devastated regions.

When the Kobe earthquake of 1995 hit, Japanese investors sold $30.0 billion in U.S. securities in the aftermath of that natural disaster. Depending on which news report you believe, the damage in Japan from last Friday’s earthquake is pegged at over $200 billion.

Japan is the second largest holder of U.S. Treasuries, second only to China. Japan holds about $886 billion in U.S. Treasuries (Source: “Rising yen adds to Japan’s woes,” Globe & Mail Mar.17, 2011). If Japan stops buying our debt because their needs have changed, and they start selling U.S. securities to bring money home for rebuilding the country, the ramifications in the U.S. will be higher interest rates.

Add to this the Federal Reserve’s comments earlier this week that they will not expand their $600-billion QE2 bond purchases, and one needs to seriously ask: if Japan will reduce its buying of U.S. Treasuries and the Fed will not continue buying them, who will buy the U.S. Treasuries we so desperately need to sell in order to finance our debt?

In light of the above events, it’s a wonder that the stock market has held up so well over the past week.

Michael’s Personal Notes:

I tried to buy more gold-related investments yesterday like I did on Tuesday, but gold prices started to rise Wednesday and they are continuing to rise this morning. Hence, I’ll sit tight for now. Hopefully we will see some more weakness in the precious metal prices, which I would view as a buying opportunity.

For those readers who follow technical analysis, my charts show good support for gold at $1,340 an ounce, about $60.00 below where it is trading today. I would be a buyer of more gold-related investments on any pullback towards $1,340 an ounce; unfortunately, this may not happen. Over the past 12 months, gold bullion is up $273.00 an ounce.

No bull market goes up in a straight line; no bear market goes down in a straight line. The bull market in gold is no exception. Since 2002-2003, I’ve followed a policy of buying gold-related investments on gold price pullbacks.

Where the Market Stands; Where it’s Headed:

Okay, Michael; what’s it going to take for you say that the bear market rally in stocks is over?

Technically speaking, the low point for the Dow Jones Industrial Average was 6,440 on March 9, 2009, when the bear market started. The high point was 12,391 on February 18, 2011. The mid-point between the high and low is 9,415. The bear market rally in stocks would have to break below 9,415 to be officially over. This morning, the Dow Jones Industrial Average trades at 11,613.

Whether you call it an overreaction to the Japan crisis or simple profit-taking, the stock market is obviously taking a breather. But until the market proves me otherwise, I see the bear market rally in stocks that started in March 2009 as still in force.

Bear market rallies usually end in the midst of investor euphoria. We haven’t seen that yet.

What He Said:

“Why Google stock will go higher: Most investors in Google, surprisingly, are retail investors. And that’s why the stock can go higher—because only 20% of the stock is owned by institutions. If the institutions jump in and buy Google, the stock will certainly move higher.” Michael Lombardi, PROFIT CONFIDENTIAL, June 2, 2005. Michael recommended Google stock as a buy on June 2, 2005, when the stock was trading at $288.00. On November 5, 2007, when Google reached $700.00 U.S. per share, Michael advised his readers to sell their Google stock and to put the proceeds into gold-related investments. Coincidently, gold bullion was also trading at about $700.00 per ounce in November 2007. Michael’s message was to trade each $700.00 share of Google into $700.00 of gold, because he saw gold as a much better investment.