The Rally No One is Talking About

All we hear now is bad financial news day after day, sometimes hour after hour. The banks are posting billion-dollar write-offs and losses. The government is bailing out Freddie Mac and Fannie Mae after coming to the rescue of Bear Sterns. The automakers are in big trouble. And rumors of GM going bankrupt persist.

Just this morning Ford Motor Co., the world’s third largest car maker, reported a staggering loss of $8.7 billion for the second quarter of this year. Aside from the oil producers, gold producers and select technology companies, one would have to ponder: who is really making money these days?

If you are an investor, reading the financial news in 2008 can be downright depressing. Thanks to the very low interest rate policy of the Greenspan regime, we are dealing with one terrible economic hangover.

The news is negative all round. The cocktail party discussions of how much technology stocks were rising in their heyday of 1999 were replaced with conversations of rising property prices by the mid-2000s. Today, the story is how your next door neighbor’s house can’t sell.

But here is something few people are talking about: The rally in the stock market. Yes, I said rally. Since its mid-July low of 10,731, the Dow Jones Industrial Average has gained 8.4%.

How does a stock market rally 8.4% in half a month with all this “bad” financial news? Some would argue that stocks were oversold and due for a rally (as I did in my July 9, 2008, PROFIT CONFIDENTIAL column, “Getting Close to a Severely Oversold Market”). Others will say it is a classic bear market trap.

But veteran stock market watchers are aware of two very important facts that 99% of investors are not. And here they are:

Firstly, the stock market is a leading indicator, not a lagging indicator. All the negative financial news we hear about is really old news that the stock market has already discounted.

In simpler words and as an example, if Ford is reporting pathetic earnings today, the event has already been reflected in Ford’s stock price because the stock market had expected Ford’s earnings to fall. Hence, by the stock market rising the past two weeks it sees brighter times ahead. Again, the stock market does not care what happened in the recent past; it is concerned with what will happen six to 12 months ahead.

Secondly, this month, the Dow Jones Industrial Average came dramatically close to the mid-point between its 2002 low and its 2007 high and did not break down below that point. In fact, the market rallied when it got close to the mid-point between its decade low and decade high. This is very important for the technical direction of the stock market.

“The stock market rally no one is talking about” is for real. Get in on it now and enjoy its ride while it lasts.