“Freaked Out” Investors Missing Out on This Big Market Rally

by Michael Lombardi, CFP

The stock market took off like a bullet yesterday, with the Dow Jones Industrial Average up a big 234 points. So much for all those analysts who had given up on the stock market rally that started in mid-March of this year!

The Dow Jones is only a paltry 272 points from turning positive for 2009. The NASDAQ and the S&P 500 are already up for the year. Even commodity prices are moving, with crude oil up 38% for the year so far to $59.03 a barrel.

From the bear market low on March 9, 2009, to yesterday, the S&P 500 has rallied 36% — its biggest two-month surge since the early 1930s. As for individual investors, they are missing out on this big market rally. When I ask my broker friends if individual investors are buying stock, they say no. According to my network of high-net-worth stockbrokers, retail investors are still “freaked out” from the losses they took in 2008 and are too nervous to get back into stocks.

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So, what’s fueling stock prices’ climb? While economists and naive market watchers would like us to believe that the economy is getting better, that’s not the real story. As I have written many times, stocks became very oversold on March 9, 2009, when they hit their multi-year low. Since that date, stocks have been coming back with a vengeance. Stocks are simply rebounding from severely oversold market conditions. Technically speaking, stocks are in a bear market rally.

Short sellers, who bet the stock market was going even lower, are getting squeezed and need to cover their short positions (which means they are buying stock). Mutual funds, not wanting the embarrassment of having the major market indices like the S&P 500 beat them this year, are slowly moving their cash back into the market, so as to not miss the boat on the rally.

Just how long will this rally last? I would expect the Dow Jones Industrial Average to recoup 50% of its losses. That would put the Dow Jones at 9,660, which means this rally has legs.

Ultimately, I do expect the rally to be short-lived and the bear market lows of March 9, 2009, to be re-tested. But in the meantime, why not buy some stock and enjoy the rally while it lasts?

Michael’s Personal Notes:

It’s a well-known fact that interest on the U.S. national debt is now running at $500 billion a year. How in the world will we be able to pay the interest on our debt, not even thinking about the principal? Like any business, there are two choices: cut expenses or increase revenue. For the U.S. government to cut expenses, it would need to make government smaller. But that would lead to unemployment, which the government does not want. So, the next choice is to increase revenue, which can only be achieved by a government by raising taxes. Great, that’s just what the economy needs, higher taxes. Maybe the government will not cut its expenses or raise taxes. In that scenario, watch for higher interest rates to attract foreigners to our bonds.

Where the Market Stands:

The Dow Jones Industrial Average is down three percent for the year. My opinion remains unchanged: The Dow Jones will soon turn positive for year. When the Dow Jones does turn positive for 2009, it will be headline news everywhere. That’s just what the big, bad bear wants: let stock market investors think everything is okay again, lure them back into the market, and take their hard-earned money away again. That is exactly what I expect to see happen.

What He Said:

“I’ve been writing to my readers for the past two years claiming the decline in the U.S. property market would not be the soft landing most analysts were expecting, rather a hard landing. My view remains unchanged. The U.S. housing bust will cut deeper and harder than most can realize today.” Michael Lombardi in PROFIT CONFIDENTIAL, June 13, 2007. While the popular media was predicting a bottoming of the real estate market in 2007, Michael was preparing his readers for worse times ahead.