Since the March 2009 market ultra lows, the market has been on a high octane tear moving ever higher. The Dow has recently moved past 11,000 reaching 19 month highs. The Dow has also enjoyed eight straight weeks of gains, giving it the longest winning streak since January 2004. The Nasdaq is also having an eight week winning streak and a third of the S&P 500 companies are at 52 week highs.
All bearish analysts are left in shock and awe as the market surges continually upward.
With all this market euphoria, shall we proclaim that the worst is behind us and that good times are here again?
If you’ve been reading my blog for any length of time, you’d see that I’ve been on the bearish side of the market. I’ve also talked about a bipolar market that acts as if either everything is good or everything is horrible with no moderate in-betweens.
Okay, so am I guilty of being a “perma-bear”, one who remains bearish regardless of what the market does and has an eternally gloomy outlook? I hope not because I can’t stand perma-bulls or perma-bears as you can’t trust what they say since they’re always one-sided.
Anyway, here’s my take on the market – we have a complete disconnect between the market technical data and longer term fundamental data. In short, I’m technically bullish on the market but long term fundamentally bearish. Here are my reasons:
Case for the Technical Bull:
One just needs to look at the ever climbing market for that. You can’t argue with the market’s upward movement. Companies are also seeing improving bottom lines from the lows of 2008/2009.
Does it make sense to you that the market has gone straight up in a “V” type recovery as if all the problems have been resolved? Have things improved that much so soon? Here’s what we are still dealing with:
1) Decades high unemployment – shedding employees will give big business employers boosts in productivity and better profit margins in the short term, but on the long term will see decreased demand and declining revenue as there are less people with buying income.
2) Crushing debt – In the aftermath of the market melt down, several cities and states are suffering with budget shortfalls. Services are being cut across the board which include fire, medical, and police services. There are municipalities that are in danger of declaring bankruptcy.
Debt problems go beyond the state level. The US Federal Deficit is well over $12 trillion dollars and climbing fast. Spiraling out of control debt will have negative implications down the line with higher taxes along with reduced services and benefits. The US dollar will also be under devaluing pressure which means the likelihood of rampant inflation along with higher interest rates. We’ve seen $4/gal gas…$5/gal and $6+/gal are real possibilities if inflation takes off.
The US isn’t the only country dealing with a huge debt problem. I’ve written about the financial crisis in Dubai and predicted that other cities and countries may also be in danger of defaulting on their debt. Since that time, Greece has moved into the spotlight of being in danger of default. This begs the question as to what other cities/countries are on the ropes, but hiding it for now? A default of a major country can have severe economic and currency impacts.
Yet despite all these real problems, the market continues to ignore them and power upwards.
One thing we know for certain is that while the market may ignore fundamentals for quite a while, it will ALWAYS respond to it eventually. The only question is WHEN. Don’t expect the main stream media to give you any advance warning….they never do.
Knowing this, the question becomes how does one invest in this market, or if they even should?
I would say yes, one can invest, but one needs to have a short term outlook, meaning being ready to move your funds to safer harbors if the market starts an extended decline. The higher the market climbs in the face of all these headwinds, the greater the risk that we are moving into yet another bubble.
The main point here is to avoid going into zombie “buy and hold” mode as this could be the worst time for it. It’s best to use technical analysis for determining when to buy or sell.