[This is the seventh installment of a new series that will explore ways for investors to recover from the U.S. financial crisis. To reach an archive of previous stories in the series, please just click on the series logo.]
By Mike Caggeso
U.S. stocks just capped off their strongest two-week performance since 1938. The Standard & Poor’s 500 Index is surging toward its third straight week of gains, something it’s done only three times since the bear market in U.S. stocks started 78 weeks ago. And the Nasdaq Composite Index has erased its year-to-date losses and is now is up for the year.
The path of least resistance is now higher," Miller Tabak & Co. LLC equity strategist Peter Bookvar told MarketWatch.com, citing such factors as not-as-bad-as-feared economic reports, optimism over Obama administration economic fix-it plans, and a recent jump in commodity prices that “has done wonders for some of the emerging markets that depend on them, whether it was Russia or Brazil.”
With an index, the S&P 500, that closed yesterday (Wednesday) at 832.86, most market bulls see an index that’s gained 167 points from its intra-day, bear-market low of 666, meaning it’s zoomed 25% in just three weeks. It also means that the closely watched U.S stock index is now only 13% below its intra-day high for the year of 943.85 – a mark set Jan. 6.
The journey from that low to that high would represent a move of 42%, but there are some experts – including Ed Yardeni, president of Yardeni Research, who believe that can happen. And why not? After all, we’re watching the best monthly market gain since 1987.
“I wouldn’t be surprised to see this rally take the S&P [500 Index] up to 1,000,” Tom Wirth, senior investment officer at Chemung Canal Trust Co., which manages $1.5 billion in Elmira, NY, Bloomberg News. “It’s been one data point after another that’s come in better than expected.”
But the bears aren’t hibernating: Once you claw away the apparent good news, you’ll find some troubling numbers, they say. For instance, this is the fifth time the market has spiked more than 10% since peaking in 2007, and two of those spikes shot up more than than 21%. They also note that the S&P 500 Index is still down 8.0% this year after sinking 38% last year – the worst annual return since the Great Depression.
Pointing to the financial sector, which has been the rally’s chief catalyst, Johnson said: “It's like a kid in school who went from getting an ‘F’ in class to a ‘D.’ People are happy, but only to a certain extent.”
There’s also the possibility that analysts, at this point, simply aren’t sure what to believe.
“Welcome to the club. Many investment managers are (paralyzed) too,” writes MarketWatch’s Mark Hulbert. “That's because, on the one hand, they're scared of the bear market continuing, making fools of those who flash ‘Buy’ signals now …Yet, on the other hand, these advisers are afraid of missing out on a new bull market, if indeed one has begun.”
The question is: Where does that leave the typical investor?
The opinion emanating from the U.S. Federal Reserve is that the U.S. economy will turn around by the end of this year or the start of 2010. And the majority of both bulls and bears agree that the stock market – typically a– will rebound before the economy does.
But before you make up your mind as to whether or not you want to join in on this rally there are several factors you should consider.
Easy-to-Read Market Indicators
Hundreds of economic and stock-market indicators exist, but many won’t be relevant – even if you could decipher them. Here are a few stock market indicators that are both reliable and readable to everyday investors.
- Blue-chip earnings reports: Stock indices won’t begin to rebound in earnest until earnings expectations improve for the companies they list. When our financial fiasco started, companies were comparing their falling earnings to results the prior year, when business was markedly better. This was one of the factors that induced investors to sell their stocks, exacerbating a decline that was already under way. With the first quarter of the New Year coming to a close, and companies in most industries closing their books and getting ready to report their first-quarter earnings, two factors will be working in their favor: First, they will be reporting against the much-lower profit reports of last year, making improvements easier; and second, earnings expectations going forward are much lower, meaning that there’s a much-greater potential for stock-market-boosting upside earnings surprises. If expectations are met or exceeded, traders can see the company’s low stock price as a deal and buy.
- Advance/Decline Line (A/D line): The A/D line is one of the most popular tools for measuring the breadth of a market advance or decline – in other words, gauging its overall strength or weakness. For instance, when more stocks move up than move down, the A/D Line moves up, as well. It’s also useful to look for divergences between a major market index, such as the , and the A/D line, as a way of determining whether a market is really in a rising or falling trend. For instance, there’s an old Wall Street adage that holds that “trouble looms when the generals lead and the troops refuse to follow” – meaning that if the Dow advances and is making new highs, but the A/D fails to do so, expect the market’s apparent charge to fall apart. Yesterday, 441 S&P stocks advanced, 57 declined and two remain unchanged.
- Volatility Index (VIX): Fear and greed are the primary emotions that drive the market. And the Chicago Board Options Exchange Volatility Index indicates the direction of the market by tracking the price of options for S&P 500 stocks – investments driven by fear and greed. When the VIX is low, option traders believe that the market will rise and get greedy with their bets. When the VIX is high, they are worried the market is going to tumble.
Green, Yellow or Red Light?
No matter how you interpret the indicators above, it’s best not to view the current rally as a green light or red light, but instead as a flashing yellow. Slow down, approach with caution, and be cognizant of everything coming at you from every other direction.
Applying that to your money and investments means cherry picking from both sides of the aisle in order to form a plan.
If you are looking for long-term gains, the bulls are more in the right than the bears. Every market downturn has rebounded. So the fact that the S&P 500 is more than 47% off its high is more of a reassuring statistic than a disconcerting one.
If you are trying to avoid short-term losses, the bears are more in the right than the bulls. This may be the most promising stock rally since the global financial world collapsed, but with unemployment high and suppressed consumer spending keeping the U.S. gross domestic product (GDP) in the red, it could also be thein a continued bear market.
“Despite the fact many investors feel like they missed the boat to get in, it's still not time to be cavalier,” says Money MorningInvestment Director Keith Fitz-Gerald.
But it’s also not the time to stand completely on the sidelines, either.
Should a bear market continue, there are still plenty of conservative investments out there – from those that pay hefty dividends to gold – that offer better potential returns than an antique Ball (BLL) Mason canning jar hidden in the bottom of your sock drawer.
“In a market as unpredictable as this one … I am less concerned with short-term rallies than I am with long-term investing success,” said Fitz-Gerald. “That’s why - if you’re thinking about getting in right now - I urge you to first carefully review both sides of the argument.”
[Editor's Note: The ongoing financial crisis has changed the investing game forever, making uncertainty the norm and creating a whole set of new rules that will quickly and painfully determine the winners and losers out in the global financial markets. Investors who ignore this "New Reality" will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive - they will thrive.
In fact, Money Morning Investment Director Keith Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as "The Golden Age of Wealth Creation." His key discovery: Despite the gloom brought about by the ongoing financial crisis, we may actually be standing on the precipice of the greatest investing opportunities we'll see in our lifetimes. To capitalize, today more than ever, investors need to employ the correct tool.
In his newly launched Geiger Index investing service, Fitz-Gerald feels that he's found that needed device. Geiger Index, developed after more than a decade of work, is a new, computerized trading model that's based on a mathematical concept known as "fractals." This system allows Fitz-Gerald to predict price movements of broad indexes, or of individual stocks, with a high degree of certainty. And it's particularly well suited to the "trendless" markets that are the norm today. Check out our latest insights on these new rules, this new market environment, and this new service, Geiger Index.]
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