Since the beginning of this year, I have been saying that I expect the bear market rally in stocks that started on March 9, 2009, to continue in the immediate term. And the stock market has been doing exactly as I asked. Good work, if you can get it!
This morning, the Dow Jones Industrial Average opens up 1.5% for 2011. That’s a gain of 1.5% in eight trading days. At that pace, the Dow Jones Industrials will gain 48.75% this year (and we both know that’s not going to happen)!
You can’t fight these facts, nor should you trade against them:
* Since March 9, 2009, the Dow Jones Industrials has gained 5,315 points, or 77%.
* The Dow Jones Industrials is at its highest level since January 2008—24 months ago!
* In respect to sectors, the Dow Jones U.S. Technology Index has been the best performer. It sits at a fresh, new five-year high this morning. The Dow Jones U.S. Financial Index (primarily the bank stocks) is still down 50% from its February 2007, high.
So it’s been a great rally for stocks. And I still don’t think it is over in the immediate term. This is based on two underlying principles that have dictated my investing strategy very successfully over 30 years: “You don’t fight the trend,” and “You don’t fight the Fed.”
History is full of casualties; investors who bet against a prevailing trend and lost. If the Federal Reserve and the government are maintaining expansive monetary and fiscal policies (like they have since the spring of 2008), you don’t trade against their actions.
The amount of support for the financial system and the economy that the Federal Reserve and the government have delivered over the past 22 months has been unprecedented. Bank bailouts and zero interest rates…even big industrial companies got bailouts or loans.
Stock markets go up during periods of expansive monetary policy. They go down when the Fed implements a contractive monetary policy. The single, biggest factor behind the stock market rally of the past two years has been the support of the Fed. Interest rates being record-low have enabled corporate America to deliver solid profits to their shareholders again.
But, at the same time, I’m a contrarian investor. I don’t like the fact that my friends are talking a lot about the stock market again. And I’m certainly not a fan of these reports I get showing that stock market advisors are at their most bullish level since 2007.
The stock market always delivers the opposite of what is expected of it. This time won’t be any different. Look at all the investors that jumped on the gold bullion bull market bandwagon in late 2010. They’re now wondering if they made a mistake (we need a good old-fashioned correction in the gold bull market to wash them out).
Eventually, the Fed will tighten their monetary policy, if for nothing but to support an ailing U.S. dollar and to fight inflation. Long-term interest rates are already up sharply since this past October despite the Federal Reserve’s Quantitative Easing Part II program.
My readers should continue to enjoy this stock market rally in the immediate term, because it will not last.
Michael’s Personal Notes:
Very little is being said about the surge in world food prices. My readers should be aware of it, as I see this as a prelude to unexpected rapid inflation.
According to the Food and Agriculture Organization, an agency of the United Nations, world food prices rose to a record in December of 2010. Sugar and meat costs were the biggest gainers. As a group, the 55 food commodities tracked by the agency were up 25% in price in December 2010, compared to December 2009.
What’s causing food prices to rise so sharply? Two answers: Rising demand from middle-class consumers in India and China and the worst drought in Russia in 50 years.
Because the world population is expected to expand to 9.1 billion in 39 years from the 6.8 billion people in the world today, the Food and Agriculture Organization says that worldwide food production will have to rise 70%. As time passes and global warming and other issues come into play, I see food production actually declining, not increasing.
Rising food prices are a real problem today—they will be a bigger problem in 2050. Those economists still stuck on the idea that deflation is a concern for our economy need to get on the right track. Inflation will be the real problem in 2011 and 2012, not just because of rising food prices, but because too much liquidity in our financial system continues to debase the purchasing power of the U.S. dollar
What He Said:
“The proof the party is over in the U.S. housing market could not be clearer to me. The price action of the new-home builder stocks is telling the true story—these stocks are falling in price daily (and the media is not picking it up). Those that will hurt most when the air is finally let out of the housing market balloon will be those buyers that bought in late 2005. In fact, the latecomers to the U.S. housing market may end up looking like the latecomers to the tech-stock rally that ended so abruptly in 1999.” Michael Lombardi in PROFIT CONFIDENTIAL, March 1, 2006. 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.
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