Dow Jones Plows Through 10,000…Where Stocks Go Next

“Profit Confidential” Column, by Michael Lombardi, CFP, MBA

Sometimes we need just to take a step back, put the emotions aside, and look at what really is going on in the financial world from a purely logical, common-sense approach.

I remember the dark days of March very well. On March 9, 2009, the Dow Jones Industrial Average hit a 12-year low of 8,776.39. Most people (and our government) were running scared. Mutual funds had huge net redemptions (more money going out than coming in). There was concern about banks going under and people losing their money. And here, at our little publishing company, we had subscribers calling in and canceling their subscriptions like never before, because they wanted out of stocks.

As a contrarian, I know that the public is always wrong when the majority of people have the same view. That view, in March, was that the financial world was coming apart. I didn’t share that view, because the Federal Reserve and the White House were doing everything they possibly could to save the economy. I’ve never seen interest rates fall so low; I’ve never seen so many companies bailed out by the government. Monetary and fiscal policies, thanks to our government, were the most favorable I had ever witnessed. Based on this, I turned bullish on stocks.

Two to three months ago, as the market rebound picked up steam; I predicted that the Dow Jones would break through the 10,000 level. My wish was granted by the “markets above” this past Wednesday, October 14.

Okay, so now that we realize March 2009 was not the end of the financial world, that all the government stimulus was smart and really helped turn the economy around and that, while job losses continue, big companies are posting solid profits, where does the stock market go from here?

As word “spreads” about the economy and stock market getting healthier, more money will come off the sidelines and into the stock market. There are literally billions of dollars on the sidelines that can enter the stock market. As the job loss report we hear each month shrinks, as some life comes back to the real estate market, you can bet your bottom dollar that the billion in cash on the sidelines will come back into the stock market. Dow Jones 11,000 is not out of the question.

But I’d like to add two very big warnings:

The stock market has now gone up 56% since its March 2009 low without a significant correction. I would not be surprised to see the market correcting soon.

I don’t expect 2010 to be as good a year for stocks as 2009 has been, because interest rates in the U.S. will ultimately need to rise (especially to support the falling U.S. dollar). If there is something the stock market dislikes, it is rising interest rates.

So you can say I’m short-term positive, but a longer-term bear. To my readers: enjoy this market rally while it lasts.

Michael’s Personal Notes:

All of a sudden, everyone wants to be my best friend. That call I made two to three months ago when I predicted that the Dow Jones would surprise everyone and break through 10,000 has gotten a lot of media attention. We are only halfway through October and we’ve already signed-up 7,507 new readers to PROFIT CONFIDENTIAL this month. The power of the Internet, I guess.

Yesterday, we sent an e-mail to all our readers about our “Michael’s Monday Morning Profit Forecaster.” Unlike other newsletters we publish, which tend to be long and with many stock recommendations, “Michael’s Monday Morning Profit Forecaster” is short, only two pages long, and makes only one or two stock-picks a month. Right now, this weekly service (which goes out every Monday morning, as the name insinuates) has nine open positions and all nine are making money. I really think it is worth your attention. In case you didn’t have time to read yesterday’s e-mail about “Michael’s Monday Morning Profit Forecaster,” we are sending out a friendly reminder tomorrow.

Where the Market Stands:

This past Wednesday, I opened this paragraph by asking, “Will today be the day…the day the Dow Jones Industrial Average plows through the 10,000 level?” Well, my wish was granted that very same day. The Dow Jones is now up 56% from its March 9, 2009, multi-year low. For the year as a whole, the Dow Jones is up 14.7% so far. Who would have thought this would have been a great year for the stock market, except those who read this column? So much for those many analysts who warned us about September and October being “bad” months for the stock market!

What He Said:

“Starting two years ago, I was writing how the housing boom would go bust and cause the U.S. economy to suffer sharply. That’s exactly what is happening today. From what I see happening in the U.S. economy, I’m keeping with the prediction I made earlier this year: By late 2007/early 2008, the U.S. will be in a homemade recession. Hence, I expect housing prices to continue declining, soft auto sales, soft consumer spending and a lower stock market.” Michael Lombardi in PROFIT CONFIDENTIAL, August 15, 2007. You would have been hard-pressed to find another analyst predicting a U.S. recession in the summer of 2007. At the time, the stock market was soaring, with the Dow Jones Industrial Average hitting its all-time high of 14,164 in October 2007.