There’s an air of nervousness in the stock market today after the market’s triple-digit dive Tuesday. I want to give my readers a good feeling of where we are with stocks.
The yield on the U.S. 10-year Treasury has been rising, but it is still below the four-percent level needed before we see money leaving the stock market for the bond market. I’m watching this risk closely, but this is more of a medium- to longer-term risk. The problems in the Middle East with civil unrest could actually make U.S. Treasuries a safe haven again, pushing yields down, as demand for U.S. Treasuries rises.
Funds available to enter the stock market on the improving economy are relatively high. There is plenty of cash on the sidelines to buy stocks and, for capital; there are few alternatives to the stock market right now. The Fed is insuring this attitude by keeping short-term rates low.
Speaking of the Fed, despite the improving economy, interest rates and the monetary environment that the Fed has control over continue to be expansive. Don’t fight the Fed. If the Federal Reserve is making money “easy,” you don’t bet against their actions in the stock market.
It all sounds so positive and rational above, right? So where is the risk in the stock market today? It is all about expectations. As a group, stock market advisors are extremely bullish. In fact, there hasn’t been this amount of bullishness in months. The bears are back to being a very small minority. As I have written countless times, the market always delivers the opposite of what is expected of it. And, as a contrarian at heart, I follow this truism for market direction.
A healthy correction by stocks would be a good thing. If stocks were to move lower—say the Dow Jones Industrial Average were to go below 12,000—the bullish advisors would start to turn bearish and market expectations would decline, creating a favorable environment for stocks once more.
At this point, my readers should not be too concerned about the general direction of the stock market if they have been following my cries to get into resource stocks and precious metals stocks. The Dow Jones Industrial fell a big 168 points yesterday, but I made money in the market yesterday, as the Dow Jones U.S. Gold Mining Index actually went up 2.4% Tuesday.
Precious metals and resource stocks…that is where you want to be when the general market gets choppy.
Michael’s Personal Notes:
I’m in Europe spending a few days with some dear friends. When I came back up to my hotel room last night and went on the Internet, I read about the stock market’s big triple-digit dive yesterday. Then I looked at my stock portfolio and saw that it gained about two percent—in single day.
My secret? I’m on the right side of the market. And my readers need to get on the right side, too. I’ve been preaching precious metal stocks, especially gold-related stocks, since 2002. Believe it or not, it is still a good time to get into this sector.
Where the Market Stands; Where it is Headed:
The Dow Jones Industrial Average opens this morning up a shrinking 4.2% for 2011. I continue to believe that the bear market rally that started in March of 2009 is still intact.
What He Said:
“Home-building in the U.S. will enter a quasi-depression state in 2008 and the construction industry will make 2008 a record year for pink slips. I predict a major homebuilder will go bankrupt in 2008.” Michael Lombardi in PROFIT CONFIDENTIAL, January 10, 2008. WCI Communities, the largest U.S. luxury homebuilder, filed for Chapter 11 protection on August 4, 2008.