The Dow Jones Industrial Average blew past the psychologically important 12,000 level yesterday. What a feat!
Less than a month ago, on October 4, 2011, the Dow Jones Industrial Average was at its lowest level since September 2010: 10,400. The widely followed stock index has gained 1,800 points, or 17.3%, in less than a month.
I know that everywhere you look in the media today you will read and hear that the stock market took off yesterday because European leaders and European banks have agreed to a bailout to save Greece. But this is not the real story as to why the stock market ploughed through the 12,000 mark—only inexperienced market watchers can be crediting activities in Europe.
The real story here, the reason stocks have risen so sharply from the beginning of October, is that the stock market became so oversold. How quickly we forget. The stock market had a terrible summer. The Dow Jones Industrial Average collapsed more than 400 points on several days in August.
The stock market simply became severely oversold. When you have stock market advisors turning to their most bearish level since March, 2009, the Dow Jones Industrial Average will simply propel the other way. Never forget—in the majority of cases, the market does the opposite of what is expected of it. When the majority of investors and stock advisors are bullish, the market will go down. When the majority of market players are bearish, the market will rise.
Let’s face the facts. At a level of 10,400, the Dow Jones Industrial Average produced a dividend yield of three percent. Compared to a three-year U.S. T-bill yield of 0.52%, stocks were a bargain. And that’s exactly what I been yelling about since the summer (Stock Market & Gold: An Opportunity Like We’ve Never Seen Before?).
“So Michael, where do stocks go from here?”
I believe stocks will continue to rise in the immediate term. The Dow Jones Industrial Average has momentum to move higher. I believe word is spreading that stocks are a good alternative to other investments. As stock prices rise, more stock advisors will turn bullish. And this exactly what this secular bear market wants—more investors to get back into stocks.
I will do my best for my readers to signal the point at which I believe the stock market has ended its current Phase II—the rally that brings investors back into stocks big-time. We could be experiencing that final, big blow-off for stocks to the upside I have been writing about.
Michael’s Personal Notes:
Over the past few weeks, I’ve been writing in PROFIT CONFIDENTIAL quite consistently on how the stock market became oversold this summer and was due for a bounce. I’ve been writing that, against the backdrop of widespread investors and consumer pessimism, combined with better-than-expected corporate earnings, stocks would rise. This is exactly what has happened.
Corporate earnings for the S&P 500 companies in the third quarter of this year have risen by an average of 16%—better than analysts had expected.
But here’s something that’s more important:
A Bloomberg Consumer Comfort Index survey last week revealed that 95% of those surveyed had a negative opinion about the economy, the worst reading of consumer confidence for the index since March 2009.
There have been several measures of consumer confidence released as of a late that say consumer confidence is at its lowest level since the stock market hit a 12-year low in March of 2009.
Long-time readers of my column are quite aware of my contrarian attitude towards investing—the best profits are made going against the “herd mentality.” When you have stock market advisors at their most bearish level since March 2009 and consumer confidence also at its worst level since March of 2009, you have a catalyst for higher stock market prices.
What happened when consumer confidence hit a low in March 2009? Stock prices started to rise. In fact, the stock market went up almost 100% from March of 2009 to May 2, 2011. Since the Dow Jones Industrial Average hit 10,400 on October 4, 2011, the stock market has rallied 17%.
As I have been writing, the stock market will continue to ride the wall of worry higher, as stock advisor and consumer confidence pessimism remains at highs not seen in almost 30 months.
Where the Market Stands; Where it’s Headed:
I’ve been writing in this column about the Dow Jones Industrial Average getting back up over the 12,000 and that’s exactly what we got yesterday. In a “huge” move, the Dow Jones Industrial Average propelled yesterday to 12,208. The world’s most widely stock market index is up 5.6% for 2011, not including dividend payouts. This market is looking more and more like 2010’s all over again (Today’s Stock Market: Making Money by Copying Last Year’s Action).
It has long been my belief that we are in a bear market rally that started in March 2009. That rally will take stocks higher first, before the bear market enters Phase III of its cycle.
What He Said:
“Consumer confidence does not change overnight. In the U.S., 70% of GDP is based on consumer spending. And in my life, all the recessions I have seen or studied have only come to an end when consumers started spending. With consumer sentiment getting worse, and with the U.S. personal savings rate at near record lows, it may take two or three years for consumers to start spending again.” Michael Lombardi in PROFIT CONFIDENTIAL, February 25, 2008. By the end of 2008 the rest of the world was realizing that the recession would be much longer and deeper than most had realized.