Special Stock Market Report

By Author: Michael Lombardi
Total Articles: 23
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My commentary today is dedicated solely to the stock market. Many of my readers are obviously invested in stocks and are concerned over last week’s volatility.

Let’s start with the general consensus…

Whatever I read this weekend, the message was basically the same: “The stock market is in big trouble.” Stock market advisors are turning bearish in droves. You read a lot about the major market indices breaking important 50-day and 200-day trend lines, hence even the market technicians have turned bearish.

I have been in this business a long time; about 30 years. I have never seen a stock market follow the direction of the consensus opinion. In other words, I doubt the stock market will make everyone happy and just roll over, as the great majority of investors and analysts believe it now will.

Let’s move to the companies that trade in the market…

Earnings in corporate America remain strong. The weak economy is not hitting the big public companies. We have yet to see any of the big 30 Dow Jones Industrial companies report downgrade revisions to their expected earnings this year. Corporate ...
... America sits on over $1.0 trillion in cash.

At a dividend yield of 2.65%, the Dow Jones Industrial Average is still a good alternative to the approximate 2.5% yield on the now S&P-downgraded 10-year U.S. Treasury. Stocks are not expensive in relation to their dividend yields and price/earnings multiples when compared to alternatives in the marketplace, including Treasuries.

Moving to the Fed and the government…

The government got what Wall Street wanted: a big increase in its spending limit. The government has been given permission by Congress to spend another $2.1 trillion of money it doesn’t have—make no mistake, Wall Street loves when the government has more money to spend.

The Federal Reserve, it is my belief, is getting ready to come out with some new form of QE3. Monetary and fiscal policy remains as accommodative as I have seen in three decades of following the markets. Both the Fed and government stand ready to jump in and “save” the economy again as needed. They will pull out all the stops…and that is exactly why this bear market rally has lasted as long as it has.

Finally, let’s look at what happened last year in the stock market, as investors have very short-term memories.

As of this past Friday, the Dow Jones Industrial Average was down exactly one percent for the year. Let’s take a quick look back at last year. The Dow Jones Industrial Average started 2010 at approximately the 10,500 level. Just like this year, the Dow Jones Industrial Average rallied from the beginning of 2010 to the spring of 2010. In the summer of 2010, stock markets in North America crashed. By July of 2010, the Dow Jones was down 8.5% for the year—yes, 8.5%!

We all know what happened after that. The Dow Jones rallied from a low of 9,500 in the summer of 2010 to close at 11,500 by the end of 2010. The stock market actually gained about 10% in 2010 despite a terrible summer for stocks.

My message to my readers…

Don’t panic. It is the worst thing you can do. Be realistic and look at the numbers. Stocks are only down one percent this year. If we look back at 2010, stocks were down 8.5% for year by the summer and they still came back to close a great year.

The majority of investors and analysts are bearish on stocks now—and we know from past experience that the majority opinion, often referred to as the consensus, is usually wrong.

Corporate earnings are strong. The government has loaded its gun to spend more. “Helicopter” Ben Bernanke and his crew at the Fed are ready to jump in and “save” the economy again if needed.

By this point in this report, you can tell I am not ready to give up on my belief that we are still in a bear market rally that started in March of 2009. I believe this bear market rally has more time left in its life cycle. Yes, the bear market rally will eventually end and Phase III of the bear market will eventually kick in—but it will not be that well-publicized.

If we were to look at this from a pure technical interpretation, the Dow Jones Industrial Average would have to fall below 9,658 for the bear market rally to officially end (the mid-point between the March 9, 2009 low and the May 2, 2011 high). We are far from 9,658 on the Dow Jones Industrial Average.

That, my dear reader, is the best stock market advice I can give you.

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