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June 17, 2009

“What the wise man does at beginning, the fool does in the end..." - Warren Buffett

THE MARKETS

The stock market has been on an incredible run over the past three months. Since plunging to multi-year lows in early March, the Dow Jones Industrial average has soared an astonishing 40% off that bottom. But even after an amazing rally the stock market index has only managed to climb back and break even for 2009.

You may have noticed there’s been a divergence of opinion on what’s fueling the stock market rally. Most analysts seem to think that we’re out of the “end of the financial system” doomsday scenario. That is one of the reasons for the big jump in equity prices since the March lows. But from there, opinions vary.

One camp says the “green shoots” are a clear sign that the economy has bottomed and that it’s just a matter of time before we are back to steady growth. Supporting this view is the fact that copper, which is traditionally viewed as an early indicator of economic strength, has risen 82% from its December 2008 low of $1.30 per pound, according to data from Seeking Alpha and The Wall Street Journal. Analysts in this camp think, “Happy days are here again.”

A second camp thinks we’re simply passing through the eye of the hurricane. They think this rally is a reprieve from the front end of the storm and that we’ll get slapped hard again when we hit the other side of the eye's wall. Folks in this group typically coalesce around the idea that government actions to stem the crisis will eventually make the situation worse, not better.

The third camp is more middle-of-the-road. They think the rally we’ve seen is a normal reaction to panic selling in the first quarter and to the massive liquidity added to the financial system. Neither bullish nor bearish, they think we’re in a broad trading range and don’t expect new all-time highs or new cyclical lows anytime soon.

As I pointed out in my March newsletter there were quite a few rallies of 40-100% during the great depression. Is this latest one just a Bear Market Rally? Only time will tell which scenario comes to fruition. In the mean time, we continue to do our best to benefit from whatever the market has to offer us.

Theoretically, just about everything that happens in the world has the ability to move markets. For example, the discovery of a large oil field off the coast of Brazil could cause oil prices to drop due to an increase in supply. A late freeze in the Midwest could cause agricultural commodity prices to rise due to crop destruction. The announcement of a $587 billion fiscal stimulus package in China could send stocks soaring as investors speculate it will lead to worldwide growth. A flu epidemic could cause stock prices to drop as it may lead to fewer people traveling and shopping, which could cut corporate profits. The list is endless.

But, here’s one more potential market moving event that many investors have never heard of. It’s called the “200-day moving average.” This is the average closing price of a security or index over the last 200 trading days. When updated daily and graphed, it creates a line that gives you a visual representation of the price trend. When the most current price breaks above this trend line, technical analysts view that as a bullish sign. When it breaks below, it’s considered bearish.

So, here’s the news – or noise – as it relates to the 200-day moving average. On June 1, the S&P 500 index closed above its 200-day moving average for the first time in 523 days, according to Bloomberg. That was the longest stretch of trading below its 200-day moving average since, you guessed it, the Great Depression. Does this mean the market will continue to move up from here?

The track record of the 200-day moving average is mixed. According to data from Bespoke Investment Group and Bloomberg, “The gauge rallied an average 21% over 12 months the last five times it crossed the 200-day mean after falling below it for a year or more.” That sounds bullish until you realize that investors using the indicator were misled in January 2002. Back then, “when the S&P 500 rose past the 200-day average, ending a 463-day stretch below it, the index slumped 23% in the following year as investors speculated interest-rate cuts by the Fed wouldn’t be enough to revive profit growth,” according to Bloomberg.

One of the fascinating things about investing is, what’s noise to one person might be news to another and vice versa. Some investors put great weight on a breakout of the 200-day moving average, while other investors simply shrug their shoulders. This 200-day moving average tug-of-war between opposing viewpoints is a microscopic example of the nearly infinite number of opposing views that buffet the market everyday. This interplay of opinions makes a market between buyers and sellers – and it’s healthy.

Just like “Beauty is in the eye of the beholder,” we can say, “News is in the eye of the investor.” So, whether we’re talking news or noise, they each have the ability to move the markets.

All this talk about "stimulus packages" and "bailouts" Now that the US National debt has exploded to over Eleven TRILLION dollars...

Do you know what One Trillion Dollars look like? Let's try to get a visual.

We'll start with a $100 dollar bill. Currently the largest U.S. denomination in general circulation. Most everyone has seen them, slighty fewer have owned them. Guaranteed to make friends wherever they go.

A packet of one hundred $100 bills is less than 1/2" thick and contains $10,000. Fits in your pocket easily and is more than enough for week or two of shamefully decadent fun.

Believe it or not, this next little pile is $1 million dollars (100 packets of $10,000). You could stuff that into a grocery bag and walk around with it...1,000,000...

While a measly $1 million looked a little unimpressive, $100 million is a little more respectable. It fits neatly on a standard pallet...100,000,000...

And $1 BILLION dollars... now we're really getting somewhere...1,000,000,000...

Next we'll look at ONE TRILLION dollars. This is that number we've been hearing so much about. What is a trillion dollars? Well, it's a million million. It's a thousand billion. It's a one followed by 12 zeros.

You ready for this?

Ladies and gentlemen... I give you $1 trillion dollars...1,000,000,000,000

Now you know!

Thanks for your trust & confidence,

ken@fordwealth.com | 201-798-7992

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
* The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.
* The Nasdaq Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Consult your financial professional before making any investment decision.
* You cannot invest directly in an index.
* Past performance does not guarantee future results.