— by Michael Lombardi, CFP, MBA
It’s up, up and away for the stock markets. The NASDAQ is up 11% for the year. The S&P 500 just turned positive for 2009 again. The broad-based Russell 2000 Index is up 46% from its November 2008 low. And the Dow Jones Industrial Average, the most widely followed index, is getting closer and closer to turning positive for 2009.
What’s happening? Why are stocks moving higher?
Here are the six main reasons stocks are moving higher:
Firstly, investor confidence is returning. Most analysts now think the worst is over for the economy and the stock market. There are only a few economists (like myself) who believe that the March 9, 2009, lows of the stock market will be retested.
Secondly, investment funds are returning back to the stock market. A mutual fund’s nightmare is to have the general stock market (an index like the S&P 500) beat it. Why would an investor park money in a mutual fund if he/she could do better with just buying an index? Fund money is coming back into the stock market.
Thirdly, the shorts are getting squeezed. A short seller shorts a stock with the goal of making money when the stock falls. If the stock starts to rise, the short seller needs to cover, often needing to buy that stock. The record number of short sellers on the stock market in the first quarter of 2009 is getting squeezed each passing day and they are covering their positions, sending stock prices higher.
Fourthly, the U.S. dollar is not collapsing, but is gradually declining against other world currencies. As long as the decline of the dollar is gradual, the stock market likes it, because many public companies benefit from a weaker U.S. dollar. For industries like domestic tourism, a weaker greenback is a boon.
Fifthly, confidence in the U.S. banking system is returning. Many banks that took out TARP loans from the government are getting ready to repay those loans.
Finally, the uncertainty of the auto sector has been fully discounted by the stock market. We now know: Chrysler will come out of bankruptcy, GM will go into bankruptcy, the U.S. government will own the majority of GM, and life in the auto industry, after considerable downsizing, will go on.
Hence, my six reasons that stocks are moving up right now. Tomorrow, my arguments for why the stock markets will eventually test their March 9, 2009, lows. In the meantime, what’s an investor to do? Enjoy the stock market rally. Many of the stocks we have picked in our various financial newsletters are up over 100% during this rally. In the very short-term here, you could make your portfolio very fat.
Michael’s Personal Notes:
The Canadian dollar hit $0.90 this morning against the U.S. dollar— the highest level for the Canadian dollar in months. What’s going on? Are things that good in Canada? No. It is that things are so bad in the U.S. The U.S. dollar in falling against all other major currencies. Yesterday, the Canadian government said that its budget deficit for 2009 would be $50.0 billion — a record for that country. So, despite increasing debt, the Canadian dollar continues to rise, on my belief, because the U.S. is so weak. Get ready for $1,000-an-ounce gold bullion. That event, compliments of the falling U.S. dollar and increasing American debt, is not too far away.
Where the Market Stands:
After yesterday’s big rally, the Dow Jones Industrial Average is now only 307 points away from turning positive in 2009. Imagine when that happens: the Dow Jones will join other major market indices like the S&P 500 and NASDAQ in being up for the year. There will be dancing in the streets. Heck, retail investors might get so excited that they’ll jump back into the market, too. Enjoy this bear market rally while it lasts. The Dow Jones Industrial Average is presently down 3.5% for the year.
What He Said:
“Any way you look at it, the U.S. housing market is in for a real beating. As I have written before, in the late 1920s, the real estate market crashed first, the stock market second, and the economy third. This is the exact sequence of events I believe we are witnessing 80 years later.” Michael Lombardi in PROFIT CONFIDENTIAL, August 27, 2007. A dire prediction that came true.