To Make Money in the Stock Market, Follow the Stock Market

Amid doom and gloom from everyone that can read the business section of a newspaper, International Business Machines Corporation (NYSE/IBM) reported that its earnings in the first quarter of 2008 jumped 26% to $2.32 billion. IBM even raised its earnings forecast for the year.

Another technology company, eBay, Inc. (NASDAQ/EBAY), said that it made 22% more profit in its first quarter. The stock is up 28% since mid-March.

And JPMorgan Chase & Co. (NYSE/JPM) announced Wednesday that it was raising $6.0 billion in its biggest ever sale of preferred stock. Of course, the money will be used to shore up JPMorgan’s balance sheet.

With oil prices at a record $115.00 a barrel yesterday… with home foreclosures, personal bankruptcies and defaults on loans all up sharply in the U.S., we have some very big American corporations posting excellent record-breaking profits.

What gives with the stock market?

>From 2005 until the end of 2007, until I was blue in the face and until no one else would listen, my interpretation of stock market action was quite negative. While many analysts were bullish on the stock market, I took the contrarian view and was a big bear.

If we look at the S&P 500 today, it is trading at about the same level it did in 2005: An investor would have been better advised not to have invested in the general stock market during that 24- month period.

But an interesting event took place in late 2007. The stock market, and in particular the S&P 500, topped out early in the fourth quarter of 2007. After hitting a peak of 1,576.09 in October 2007, the S&P fell 20% by the first quarter of 2008.

The stock market had spoken: It had declared that the economy would get very difficult in the months ahead. And, as is always the case, the stock market was right. (As I’ve always said, to make money in the stock market, one needs to only follow the actions of the stock market!)

Today, the stock market is telling a different story. The S&P 500 is up 8.5% since its March lows. The Dow Jones Industrial Average is up a huge 1,110 points since its January lows — a gain of 9.6%!

With this action, the stock market, as I have noted before in this column, is telling us that the economy will get better and that the worse may be behind it. And I’m going against the popular opinion again and taking the contrarian view that everything Fed Chief Ben Bernanke has done for the economy will result in the economic turnaround we need.

Yes, we’ll hear more about home foreclosures and consumer loan defaults, but the stock market is telling us that the damage has already been done. And when you see record profits by IBM and eBay, when you see JPMorgan easily raising $6.0 billion, you get confirmation of the stock market’s positive action and outlook.