Up, Up and Away for Stocks

by Michael Lombardi, CFP

All the world’s financial problems solved thanks to zero interest rates and an ever-expanding money supply? How can one not think so after how the stock market is performing?

Here’s the score card on how the major markets are faring in 2009: NASDAQ up 10%, S&P500 up 3.0%, Dow Jones Industrial Average down 2.0%, gold bullion up 4.0%, and crude oil is up 37%.

The Dow Jones Industrial Average, despite being up eight of the last nine weeks, is the only major market marginally down for 2009. I started predicting it two months ago: All major markets will regain their 2009 losses and turn profitable for year. I expect the Dow Jones Industrial Average to turn positive for 2009 soon, too.

Small-cap stocks have been the biggest market performers to date. And if you feel you are too late to join the recovery, you are wrong. Many of the stocks we recommend in our various stock market advisories have gained in excess of 100% this year. And I believe the “hammered” small-cap stocks are headed even higher.

Who would have thought, at the market lows on March 9, 2009, that the markets would rally back so nicely? Well, according to our in-house technical analyst Anthony Jasansky and his studies of the Relative Strength Index and Fibonacci retracement, the stock market advance may only be halfway through.

How long will the rally last? I don’t believe anyone knows. I’m
treating this stock market action as a rally within the confines of an overall bear market. Stocks are simply rallying from the severely oversold condition they reached on March 9, 2009.

Enjoy the rally while it lasts, because it won’t. The bond market looks like it is starting to fall apart, which signals higher interest rates ahead. The U.S. dollar is also starting its long-awaited decline against other world currencies. We are watching the markets closely with the reading that stocks are continuing to rebound in the immediate term, but longer term we feel they will eventually retest their March 9, 2009, lows.

Michael’s Personal Notes:

The so-called “stress test” the major 19 American banks were put through, in my opinion, was somewhat of a joke. At the end, we are told these banks need $75.0 billion to shore up their balance sheets. Big deal; $75.0 billion is pocket change to a government that already made pledges of $12.0 trillion to kick-start the economy. The stock market obviously hasn’t been too concerned either. In fact, the market is saying $75.0 billion, that’s it to pass the stress test? I personally wonder if the black hole of non-performing banks loans is much, much larger.

Where the Market Stands:

The Dow Jones Industrial Average is only a paltry 2.3% away from breakeven for 2009. As noted above, I expect the Dow Jones to soon turn positive for 2009. Money managers are moving off the sidelines and putting their cash into the stock market. Why? Because, if they don’t, their fund performance will be worse than the general stock market averages and no prospective or current customer likes to see that. The shorts are also covering, sending stocks higher.

What He Said:

“Many of today’s consumers have purchased properties with very little down payment. They’ve been enticed by nothing-down, interest-only, second and third mortgages. Bottom line: The lower interest-rate environment sucked consumers into the housing market big-time. And that will eventually cause us all problems. Michael Lombardi in PROFIT CONFIDENTIAL, June 22, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.