Yesterday’s 250-Point Rally Very Significant for Stocks

dow jones gainI’m looking at the major business newspapers this morning and I see one big story missing from page one of these newspapers, “Dow Jones up 250 points yesterday, single-day gain of 2.3%!”

Yesterday’s big rise in the Dow Jones Industrial Average is very significant for the stock market.

As a leading indicator, the market predicted the turnaround in corporate profits months ago. That’s why stocks are up about 70% from the spring of 2009.

While not moving in a straight line, the Dow Jones was able to reach a two-year high of 11,451 in early November. In all markets that rise for an extended period of time, profit taking is as natural as the snow the northern states will get this winter. Profit taking took the Dow Jones below 11,000 early this week and then, presto, just like a rubber band, the market rebounds with a huge 250-point rally.

Why do I see yesterday’s one-day rally as significant? Because it signals that the bear market rally that started in March of 2009 still has upside potential. Investors, sitting with billions of dollars on the sidelines, only really have two things to worry about: The real estate market and higher interest rates in the U.S. Otherwise, it’s a green light for corporate profits.

Look at it this way: An investor who bought the Dow Jones on Tuesday made more money on Wednesday than he or she would have by holding U.S. T-bills all year!

Just this morning…

Target Corp. (NYSE/TGT), the major American retailer, said its same-store sales rose 5.5% in November from November 2009, beating analyst expectations.

Saks Inc. (NYSE/SKS), the high-end retailer, said cash registers at its same-store locations rang up 5.3% more in sales this November than in November of last year.

Gap Inc. (NYSE/GPS), a major American clothing retailer, said this morning its November same-store sales were up four percent from last year, also beating analyst expectations.

(I told my readers months ago to look at the retail stocks because they would surprise this holiday season on the upside…and they have. I still think the major retail stocks have more room on the upside for price appreciation.)

Corporations are pumping profits and investors have few choices when it comes to parking their cash. Stocks still look attractive at these prices levels.

Back to the major headline missing in today’s newspapers…

Very few people writing about the financial news are seasoned financial analysts. What makes a great financial analyst: someone who has traded the markets for at least 20 years; someone who has a major economics or similar educational degree; a person who has studied technical analysis and has taken difficult courses on stock market analysis; and, most importantly, someone who has put their own money on the line and won.

But think about it for a minute. If a reporter possessed everything I just listed above, why would they be a reporter? Exactly; they wouldn’t.

Michael’s Personal Notes:

I flew back yesterday afternoon from Las Vegas and can tell you this about Sin City:

Tourists are starting to visit Vegas again. Sure, the hotels are cheaper than ever, and the casinos are not as full as they used to be, but business is 100% better than the dark days of late 2008 when Vegas went “dark” for months.

The problem in Las Vegas, like every other state that was fast-growing during the boom days that ended in late 2007, is the real estate market. House prices in Vegas are down 40% to 50% from their peak and show no signs of recovery. Developers built condo buildings hoping gamblers would buy them as second homes, and this idea, for the most part, flopped as well.

The Cosmopolitan of Las Vegas (a huge 2,000-room hotel/casino development) is scheduled to open before Christmas. Deutsche Bank took over the hotel after it foreclosed on its mortgage. I find it very interesting that the bank has decided to keep the hotel complex as opposed to selling it. The bank is likely willing to wait until the market improves before selling the hotel, a big vote of confidence for Vegas.

Vegas looks a lot like the rest of the U.S. right now: Consumers are slowly opening their wallets, real estate is very depressed, and high rollers, while nowhere near the many that existed in 2006 and 2007, seem to keep the baccarat tables open.

(On a side note, in November, we broke a record for the number of people who signed up to get PROFIT CONFIDENTIAL—17,776 new readers in one month! Welcome to our thousands of new readers. Each day on these pages, as financial writers, we try our best to analyze today’s economic news with a different spin. Like a baseball game, we try to go to where the ball is going, not where it has been. It is very satisfying for our editors to see so many new readers. Thank you!)

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average starts this morning up 7.9% for 2010. The bear market rally in stocks that started in March of 2009 is alive and well.

What He Said:

“Even the most novice investor can now read the chart of the Dow Jones U.S. Home Construction Index and see that it is trading at its lowest level in five years. If, like me, you believe that stocks are an indication of what lies ahead, this important index is telling us housing prices are headed to 2002 levels! What would that do to the economy? Such an event would devastate the U.S.” Michael Lombardi in PROFIT CONFIDENTIAL, December 4, 2007. That devastation started happening the first quarter of 2008.