Monday, August 31, 2009

Is This The Correction We've Been Hearing About?

Unless you've been asleep for the past three weeks, or simply not paying much attention (probably not a bad idea), you know all the financial talk has been about the eventuality of a correction in the US stock markets. The major indices have flown too far, too fast, say the pundits and CNBC-geniuses, and a 10-15% pullback is not only necessary and healthy, but, get this, inevitable.

News flash: Nothing, and I do mean nothing, is ever inevitable when it comes to stocks. Not even the most mundane exercise as paying out a quarterly dividend is a sure thing until the deed itself is done. Jail cells, rooming houses and cheap bungalows are full of the leftover souls who bet on a sure thing... and lost. There is no such creature ever made, I tell you. Certainty is the stuff of wide-eyed speculators, little children, kings and tyrants. It has never been the province of the investor class, and never shall it be. Because just as certain as one is certain, there is certain to be destruction in one's path. As soon as investors get too complacent, giddy or confident, there is almost surely going to be a set of circumstances which kicks the platform right out from under their feet.

And that's why I'm convinced the market is going higher: because so many people are saying it's got to go down.

Let's face the facts, or, rather, the facts as they were presented to us. A year ago, we all thought the world was coming to an end, at least on Wall Street. Bear Stearns went belly up. Then Lehman Bros. dove into the dustbin of history, then Merrill Lynch followed. Stocks swooned. It was, actually, the second leg of the bear market which had begun almost a year earlier, in October, 2007. The third leg was January through March of 2009, and that, my friends, was probably the most brutal, excruciatingly painful period for most investors because it was not so sudden, like the fall of 2008, but rather akin to Chinese water torture: a slow drip, drip, drip that left wallets empty, portfolios drained and fund managers whimpering for mercy.

And then, just like somebody flipped a switch, it stopped. Stocks started going higher. A little bit at first, then more momentum carried a second wave and folks began to pile into stocks again. Even though unemployment spiked, there seemed to be plenty of money out there in America, thanks largely to the Fed and the Treasury and the stimulus and the trillions of dollars pumped into the economy through a variety of means. We survived. And now we shall prosper, shall we not?

If you haven't got enough nerve to hold onto winners through the next six to eight weeks - putting us firmly into 3rd quarter earnings season - then maybe you shouldn't be trading stocks, gambling with your retirement money. Those who follow the crowd and cash out - little piggies - will get slaughtered by missing the next wave. Sure, there is going to be some sideways action, but there's a magic number out there, there always is and it's 9625 on the Dow. Once that level - which is the interim peak after the major September-October 2008 decline, reached on November 4, 2008 - is breached, and the index closes above that level, we will have re-entered bull market territory.

The Dow has already crossed that particular rubicon twice: on August 24, 25, 27 and 28, and each time it met that resistance, the index pulled back. Like an impatient lover, it keeps probing and prodding, but the object of its affection - higher prices - remains just out of reach and pushing back. Today, Monday, was nothing more than a sign of frustration on the part of many, many investors, who feel that penetrating resistance has become futile just because we're entering the month of September, a traditionally poor month for stocks.

Rubbish! The time of year has about as much to do with trading stocks as the moon phases, floral patterns or the zodiac. Trading is about fundamentals, not tea leaves, Tarot cards or Ouija boards, and the core fundamentals won't be fully understood until after companies release 3rd quarter, or even 4th quarter, earnings reports, and by then, good buddies, it will be TOO LATE. TOO LATE. TOO LATE. The profit train will have left the station. So, if you're not already on board, get on board and if you're already on board, hold on for a bumpy ride. The US economy is still the most powerful engine of growth in the world and it hasn't quite run out of steam, or gas, or coal, just yet.

Getting back to stocks, just take a look at the prior six closes on the Dow: 9505.96, 9509.28, 9539.29, 9543.52, 9580.63, 9544.20. And today's close, 9496.28, well, that's almost 10 whole points lower than where we started on Friday, August 21. In seven sessions, the closing prices for the Dow have been within a 1% range. That's called consolidation, not breakdown. The people saying there's a correction coming just don't know how to read charts. Besides, there is still money sitting on the sidelines, waiting for an opportunity to get into the market. This money is mostly in the hands of the most nit-picking and skittish investors with no appetite for risk, probably baby boomers within three years of retirement who have seen their plans upended over the past two years. Now, they won't be water skiing in the Bahamas in 2013, but backyard barbecuing in Bangor, more likely, BECAUSE THEY, TOOK THEIR LUMPS LIKE LOSERS AND MISSED THE PROFIT TRAIN AS IT LEFT THE STATION.

Don't be like them. Stay invested. Sure, take some profits, but plow them back in. The last four months of 2009 are going to be nice. There'll be a pullback here and there, but nothing dramatic. At some point in either October or November, the CNBC talking heads can celebrate breaking 10,000 again! How often does that happen? Answer: Seven times in 10 1/2 years: March 1999; March 2000, April 2001, February 2002, May 2002, January 2004 and of course, here in late 2009. It's actually overdue. Don't be a party pooper.

Dow 9,496.28, -47.92 (0.50%)
NASDAQ 2,009.06, -19.71 (0.97%)
S&P 500 1,020.62, -8.31 (0.81%)
NYSE Composite 6,643.24, -65.80 (0.98%)

On the day, advancers took a serious beating by declining issues, 4673-1772, but new highs maintained the bias over new lows, 104-51, though the numbers on both sides of that ledger have been shrinking of late, indicating some kind of pressure mounting for a movement one way or the other. Volume was on the sluggish side, when it should actually be improving. It could, of course, be a semi-permanent feature of the markets. Hedge funds and little guys have gotten kicked so often and so squarely in the teeth that they may have made their way off the island and into permanent retirement. Maybe they're saving coins and stamps or clipping bond coupons. In any case, volume has been depressed for months, so maybe that's good.

NYSE Volume 1,513,536,000
NASDAQ Volume 2,268,241,000

Commodities took a more serious turn to the downside on this last day of August, with a few notable exceptions. Oil for October delivery fell $2.78, to $69.96. Hooray! Drivers need a little break and now, with all those clunkers off the road, there should be more supply, right?

Gold dipped $5.30, to $953.50, but silver gained 11 cents, bucking the trend by ending higher, at $14.92. Silver is going higher from here; oil lower. Gold will remain stuck in a range between $845 and $985. It will NOT break $1000 this year.

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