Smart Money Sees Tide in Stock Market Changing

The stock market came roaring back yesterday… and it was no “April Fool’s” joke. The stock rally was strong Tuesday, with the Dow Jones Industrial Average up a huge 391.47 points, or 3.2% — the best start to the second quarter for the stock market in over 50 years.

I received plenty of e-mails at the end of March when I wrote my column entitled, “A Contrarian View of Wall Street’s New Best Friend.” In that column, I reported that I’ve never seen the Fed help Wall Street so much in such a short time period. I also stated, for the first time publicly, that I believed the stock market has discounted the worst for the economy for 2008 and that the worst of times were behind us.

Many of the e-mails I received after that article was published (most from new readers) chastised me for being optimistic when everyone on Wall Street and business is negative. Where were these people when I was saying get out of real estate in 2005 or get into gold in late 2001, early 2002?

I run against the crowd. And that philosophy, combined with a basic understanding of stock charges, has guided me well over the past 25 years. (On a personal note, after being so negative on the economy since 2005, it’s a breath of fresh air to be positive… especially when so many people are negative on the economy and stock market these days.)

Please, don’t get me wrong. There are plenty of problems in the economy. The housing market will take years to get rid of its supply. People will walk away from houses; banks will hope 2008 never happened.

But the stock market is my main leading indicator. Key stock market indices never broke below their January 2008 lows. Now the stock market is rallying strong. As a leading indicator, the stock market is telling us that better times, not worse times, are ahead. And, the whole time I have been in this business, the stock market has always been right.

The newspapers and Internet today will tell us that stocks rallied on April Fool’s day because Lehman Brothers Holdings, Inc. (NYSE/LEH) and UBS AG (NYSE/UBS) are raising money to protect themselves against further losses.

The real story?

U.S. stock markets lost 10% in the first quarter of 2008 — one of the worst three-month performances in five years. Seeing this price action, the U.S. Federal Reserve jumped in to the financial system with all kinds of bailouts for Wall Street and the banks. Most importantly, the Fed presented the most aggressive interest-rate cuts in 20 years and that’s what is spurring stocks higher. And that’s why the smart money sees the tide in stock market changing.