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Critical Economic and Market Commentary January 28, 2010

Posted At : January 29, 2010 12:07 PM

Market Update – Emotion Vs. Facts

The current correction is unnerving to all, and the debate rages on whether this is a normal correction or the end of the rally. At this point, it is important to step back and look at it objectively. As with any debate, there is always two sides: the emotional and the factual.

The emotional side is primarily the individual investor, the average citizen, who insist that the rally must be over because the economy is inherently weak. This is most obviously seen in the investor sentiment figures which have shown the individual investor bearish since the rally began 10 months ago. Just this past week, the AAII shows just 40% are bullish, well below the 50% usually required for a market top. I can confirm this, as the people I talk too are overwhelming negative on the economy and thus the market.

The Facts tell a different story. Although the market has been weak lately, with the correction not quite over yet, several indicators that look at the number of stocks hitting new highs are saying that we are still weeks if not months away from a top.

The last 13 bull-market tops just 13.2% of NYSE-listed issues were hitting new weekly 52 week highs at those bull market peaks. At the October 2007 market topthe percentage stood at 14.4%. At the bull market top in early 2000, furthermore, the comparable percentage stood at just 6.4%. as of last week, 25.1% of NYSE listed issues hit new 52 week highs. That’s higher than the comparable percentages at any of the last 13 bull market peaks.

In addition, there typically is a long lag time between when the percentage of stocks hitting new weekly highs reaches its peak and when the bull market finally tops out. In fact, the average lag at the last 13 bull market tops was 33.6 weeks — nearly eight months. And on none of those occasions did the bull market top out before the percentage of weekly new highs.

Given that the statistics show this to be just a normal correction and that the individual is almost always wrong. (Typically the time to buy is when they are bearish and time to sell when they turn Bullish), the end is not here…yet, but that will change on a dime so be ready.

Economic Update – Economy heating up or heading for a double dip flu

The same “emotion vs. Fact” debate rages here as well.

I agree with the emotional side: The situation looks grim as we grapple with enough debt to choke a Banana Republic, unemployment not rivaled since the 30’s, and worsening demographics as our population ages and naturally turns from spender to saver.

However the facts tell a different story. The latest barometer, the US Leading Indicator finished rose for the ninth consecutive month to a record high of 106.4. In fact, the fourth quarter of 2009 will go down as a record breaker. All of the components are seeing improvement, with 8 of 10 positive in December. The best showing came in the interest rate spread, building permits and average weekly initial claims for unemployment. The two weakest stats, average workweek of production workers and manufacturers’ new orders for consumer goods remain level, which is positive. This clearly indicates that conditions are improving and will continue to improve through 2010.

Conclusion: It’s OK to be emotional about your family, about your job or even your car but not about your money. That’s why managing your own money is such a daunting task. Be the expert or hire one.

Our proprietary process has been building successful retirement and tax-advantaged portfolios for over 25 years. If you would like to discuss the market, economy or just get a free 2nd opinion on your portfolio, simply click this link – Info Request  

Regards – Keith Springer of Sprnger Financial Advisors

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