There is an old saying "anything's possible." That is just what has left most money managers and private investors scratching their heads. Since hitting its low on March 6th the Dow has turned in an impressive 25+ percent return-- about two-years- worth of returns- in six weeks! What I find very interesting is that most investors missed this huge move upwards because they were "waiting for the bottom." The Marketdoc Report has talked about this move since February 23rd.
There is no doubt the market now is showing signs of being short-term overbought. The real question remains as to whether it will retest its lows or continue upward after a short consolidation. Lets look at some factors which might affect a move in either direction:
1. The market is looking for STABILITY with regards to our banking system. It wants some assurances that we are not facing an economic doomsday scenario. We have seen some change in sentiment recently that a meltdown is not imminent. Today the market reacted negatively toward the news about which banks may or may not pass their "stress tests." This is utter nonsense. Why? Because banks have already started showing profitability in the first quarter 2009 when we are still in a recession. The concern has always been about the ability of banks to lend against their capital base due to the so-called "toxic asset problem." Many argue this problem was created when FASB made banks change to mark-to-market accounting of its assets. The banking problem is about CAPITAL STRUCTURE and lending practices, not that there are no loans out there to be made. For this reason, I believe all the political posturing and rhetoric in Washington is just that-- posturing and rhetoric. Washington has actually contributed to the problem by implementing RETROACTIVE conditions of its TARP funding. Some banks want to repay TARP funds but can't. That is why there is still uncertainty regarding this problem. The "toxic asset problem" will slowly be resolved as the real estate market makes a comeback as we are already seeing in many parts of the country.
2. The Fed's expansionary monetary policy should give a jolt to the economy (some argue this is not necessary) but may have long term ramifications as all this liquidity makes its way through the system. It will also weaken the balance sheet at the Fed.
3. After breaking out of its descending wedge formation, the Dow has placed its best week-to-week performance in 70 years. It will take alot of momentum to reverse its current trend. Something on the lines of a terrorist attack or nationalization of banks would do it. But I dare say even Washington sees that it is a bad idea to nationalize our banking system. A typical retracement when we see a reversal like this would be about 40%. This would place the Dow somewhere around the 9000 level.
4. The monthly Dow chart is showing bullish "crossover" signals at several technical indicators such as price rate of change and stochastics. There is decreasing negative volume as well.
5. The market tends to precede the overall economy by about six months. The Fed is even now predicting that the recession will end in either the third or fourth quarters of 2009. This further adds credibility that the market will continue higher.
6. There is an old saying "sell in May, go away." If our pattern holds correct we could reach an intermediate term high in May. This is a potential negative and we could retest the March lows if we flounder around the 8000 level without moving higher.
Could all of this be wrong? Of course. These are merely a few technical and subjective ideas which can have some influence on which way the market will go. For the record, I expect the market to move higher at least through the end of April. At minimum, we are seeing the best buying opportunity in about 10 years! Could we see the best buying opportunity in 20 years? Sure. Only time will tell!
Note: The above commentary is for information purposes only. Any decisions to buy, sell, or hold a specific investment in a portfolio should be discussed with your personal investment advisor.
