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Critical Economic and Market Commentary – July 31, 2009

Posted At : July 31, 2009 9:59 AM

If planes can fly…. So can the market.
Years ago I had a friend that used to say that the only reason planes fly is that everybody on board believes they will. (My engineer clients are cringing right now). OK, let’s use another analogy. Bumble bees. According to physics, there’s no possible way a bumble bee can fly. However, the bee doesn’t know that. He just flies. At the moment, the stock market is that bee. The optimists, touting the end of the recession and a robust recovery, are driving up prices. True, the economic #’s look pretty good so who’s to argue…in the short term. In fact, as I said last week, the market will not peak until more people become bullish. Too many people are currently bearish and if it let go now, too many people would be right. Right now, the majority of investors, individuals and institutions, missed out on the last leg up (mutual fund redemptions exceeded purchases). After missing out on that up move, many are left waiting for a pull back so they can buy back in at lower prices. This market is not accommodating this group. Today, the % of bullish advisors is only 36.7%. This indicates a lot of skepticism by professionals and leaves a lot of room for the market to move on the upside before becoming overbought. Too many investors and advisors are missing out on what is happening today, they continue to fight the last bear market. Keep in mind that all it’s going to take is a little bit more of an upswing before this happens, so enjoy it while it lasts but you must be alert.

In the big picture, things look as dangerous as ever. (Yes, as bad as last fall). For example, Durable Goods Orders came in well below expectations this morning, down -2.5% for June. This was well below the consensus estimate, which forecast a decline of -0.6%. Further evidence that, to put it simply, “nobody’s buyin’ nothin’”. Regardless however, the market has been very resilient, holding up quite well to this news and maintaining its uptrend. For the time being, don’t fight the trend. I went positive in my March 11th newsletter, and I’m not reversing that…yet, but as you’ll see in the Prepare your portfolio part below, the time is fast approaching.

Strategy: Prepare your portfolio for the next cycle…it’s just around the corner
The current rally is still considered as taking place within the context of a longer term bear market. However, given the market’s recent resilience in the presence of persistent overbought readings, any correction which does unfold from here does have the potential to be rather short-lived. This would be particularly true if the correction occurs on light volume and is due more to a decrease in Demand than an increase in Supply. Only if the decline were to occur on expanding volume and a sudden jump in Supply would the odds turn in favor of a more protracted sell-off. This does not mean that a new bull market has started. This is just a bear market rally and should be treated as such. When this markets turns it will turn fast and leave the majority of investors’ in pain. Everybody thinks that they will know when to get out…but they won’t. That’s when I get the most calls. Only then I have far less assets to work with. So far, our strategy of demanding real returns through high yields on stocks and corporate bonds, usually exceeding 10%, and tax-free bonds where necessary. I am very proud to say we had a great year last year and are also having a great year this year.

Regards – Keith Springer

Author of Facing Goliath

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