How do I feel this morning? Vindicated.
I’ve been writing on these pages for months that the stock market has been in a bear market rally that started in March 2009 and that stock prices would move higher before Phase III of the bear market ultimately sets in and brings stocks back down to their March 2009 lows.
Over the past few weeks, I’ve been getting e-mails from my readers telling me that I’ve been in “bear market rally” mode for too long and that the markets were done…the bear market rally was over. And, presto, what do we get? A single-day 490-point jump for the Dow Jones Industrial Average yesterday—its biggest one-day gain in years!
All of a sudden, the Dow Jones Industrial Average is up over 12,000 again, this bear market rally is up close to seven percent for 2011 including dividends, and it looks like the stock market will end 2012 where I predicted it would (see Stock Market: Where it Will End 2011).
Yesterday, six world central banks (including the Federal Reserve and the Bank of Canada) cut the interest rate at which banks can borrow U.S. dollars. Hence, the cost for European banks to borrow the greenback has dropped significantly from the three-year high it stood at the day before.
Dear reader, I don’t pretend to be the smartest analyst or economist in the world. In fact, I’ll be the first to admit that I don’t think I fully understand the effects of the announcement of the six central banks yesterday. But I do believe it has something to do with either printing more money or expanding the money supply again, as I see gold bullion is up $40.00 anounce since the news came out that these six central banks would reduce the interest rate at which banks can borrow the greenback.
For the benefit of our new readers, a bear market rally’s purpose is to lure investors back into the stock market. A Phase I bear market started in October of 2007 and brought stocks down to 6,400 on the Dow Jones Industrial Average on March 9, 2009. On that date, a Phase II bear market, often called a bear market rally, started.
That bear market rally has been going on for months due to the U.S. government’s bailout of Wall Street and the financial system and the Federal Reserve’s massive expansion of the money supply. The government and Fed are fighting the bear tooth and nail…and that’s why this bear market rally has lasted so long. A bear market rally ends when investors have reached the point where they believe the stock market is a safe place to invest again—we’re not there yet; too much pessimism reigns. A Phase III bear market, the final phase, tends to bring stocks back to their original lows reached at the end of the Phase I bear market.
My fellow financial editor, Robert Appel, BA, BBL, LLB, sent the below e-mail alert yesterday. I feel it important to share with my Profit Confidential family of readers:
“As we move into the last month of the year, we want readers to know that, on a balance of probabilities, December should perform and put some cash in our pockets. While there are no guarantees—indeed, catastrophe looms daily in world events—these are our reasons why we believe December will be a good month for investors:
“The stock market had started to rally in the fall and was derailed by Europe. However, one often hears that the stock market, like a horse, ‘prefers to move in the direction it was already headed.’ Since the European Union must (repeat MUST) define their solutions in December (holiday or no holiday), we would expect further strengthening, not weakening, assuming the EU can maintain a united front (itself a big supposition, of course).
“Secondly, the bankers (who most of us just found, to our shock and horror, really do rule the world—and make the politicians jump to their commands, it seems) traditionally need a strong December/January to move money around, mop up unused pension funds, and clean up balance sheets. And then pay themselves their typically outrageous year-end bonuses. So they are motivated.
“Thirdly, as for the mining sector, we have noticed that the ‘gold whackers’ like to play both sides of the fence. That is, even though the gold whackers make most of their cash by shorting for their clandestine ‘clients,’ every now and then, they will mix it up by going long after a big short, then ‘standing aside’ to let gold’s natural momentum move it up, taking their profits, and starting shorting anew at higher levels. We think this could be the pattern in December.
“Finally, by now everyone and their brother understands that, at current gold bullion prices, the gold mining stocks are trading at valuations (depending on which chartist you listen to) between 10- and 30-year lows. When the common wisdom actually reaches the common people, usually paradigms will finally shift. The chance to load up on the gold miners at bargain prices is coming to an end, we think.”
Where the Market Stands; Where it’s Headed:
Yesterday, if you read the popular media, you’d think yesterday’s huge, single-day, 490-point jump for the Dow Jones Industrial Average has everything to do with the six central banks saying they cut the interest rate at which banks can borrow U.S. dollars. I’m not so sure this is the reason.
A big concern for investors, governments and economists these days is the slowing Chinese economy. China, an economy that has been growing at 10% per annum for years, the foreign country that buys the majority of the U.S. Treasuries, the country that Europe went to, to ask for a bailout, is seeing its economy slowing. And this is instilling the fear that the world economy will start to slow.
Yesterday, the Chinese government reduced the amount of cash that banks must set aside as reserves to make loans—the first time it has done so since 2008! This move will increase credit in China and help the Chinese economy immensely.
We continue to be in a bear market rally that started in March 2009.
Michael’s Personal Notes:
“I see the coming recession being deep and difficult because U.S. consumers do not have the savings to spend their way out of the recession. The same thing happened in Japan. The Japan example proved that, when consumer confidence is shattered, even zero percent interest won’t spur consumer spending. The same thing could happen here.” Michael Lombardi in PROFIT CONFIDENTIAL, August 23, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.