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Economic and Market Update – May 6, 2009

Posted At : May 7, 2009 10:11 AM

Stock Market Update:
It’s a “not the end of the world” rally – Let’s party like it’s 1999!

The market continues to take all non good news in stride, convinced we will live to see another day and that the economy will rebound by year’s end. The stock market certainly believes it, and is in its normal rising pattern several months in advance of the belief of a rebound even though we won’t see evidence for several months after it as happened. Considering the strength of the rally, the fact that most investors have not participated in it and are shell-shocked on the sidelines, and the overwhelmingly negative sentiment which set us up for anything short of an asteroid hurling towards earth as a positive, it looks like the gains will continue. The markets like to defy and do the opposite of what is expected. The “hope” rally is well underway, and should continue albeit with normal pullbacks, corrections and consolidation. Keep in mind, it is a very selective market and very dangerous, so position accordingly. Let us not forget the old adage: “Sell in May and walk away”.

Strategy – Don’t fight the trend…which is finally our friend
The trend is currently up, and one should not fight the trend. That does not mean you should throw caution to the wind. Expectations were so low that they were hard to meet, (I have not heard of any asteroids of late) and that sigh of relief is traders bidding stocks higher ahead of the public which is par for the course. We are not out of the woods by any means, but enough people might think so to propel this market higher, a lot higher as long as imminent Armageddon doesn’t return.

Investors should keep in mind that recovery rallies within extended bear markets are often very impressive.  If the rallies were not impressive they would not fulfill their function. They frequently last just long enough and carry just high enough to convince large numbers of investors to jump back into a perceived new bull market.  And, those who become complacent are often trapped when the market’s primary downtrend resumes.  Thus far, this recovery rally has been very impressive.  Several of the leading price indexes, notably the S&P Mid-Cap, Nasdaq Comp., and Nasdaq 100, have broken out above their previous Jan’09 highs. And, the positive momentum of the market has remained strong despite several bad news items.  All of these factors suggest the rally could continue in the weeks ahead.

I am pleased my work allowed me to become positive back in early March (see March 11th commentary), and one needs to be nimble and not overstay your stay. This still seems appropriate.  The majority of recovery rallies within extended bear markets tend to last around eight weeks.  A smaller number have continued into a third month, and there are a few outliers in history that have extended to as much as five months before the primary downtrend resumed.  Since we have now completed eight weeks of this rally, investors should remain alert.

Take Action: Use this period of stability to re-position your portfolio for the resumption of the bear market and the NEXT bull market, which is still a ways off. Don’t take this as glum news, as money can be made in this market provided you are positioned correctly. Do not get complacent, put your head (back) into the sand or (back) under a rock. Take control of your portfolio. If you cannot afford another huge drop, you better do something. If you are managing your own money or someone else helped you lose it, and you lost more than you think you should have, wanted to or thought possible, change your strategy and work with a financial professional that knows what they are doing. The destruction didn’t happen to everyone. As this market rises, everyone is going to feel how brilliant they were for hanging in there and having outsmarted the market, even though they have investments they shouldn’t have. The collective “crying in your beer” will come after traders are out, having sold to the unsuspecting long-term buy and hold investor. You don’t have to live helplessly through the next downturn. Us this period of stability to rationally adjust your portfolio before instability and thus ir-rationalization return. For a free review or 2nd opinion, call me for a review at 916-925-8900. I can’t stress this enough. Meet with a Financial Planner that knows what they are doing. Whether it’s me or someone like me, don’t wait until it’s too late.

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