Thursday, 10 December 2009

Rose Colored Glasses

A lot of people (professional & amateur alike) are looking at the past 8 months in the stock market and proclaiming a new bull market. And they may be right, but only in the short term. It helps to take a look at the big picture every once in a while to see where you are. The optimism in every market right now is contagious (i.e. gold, oil, world markets, coal, copper). All these markets have been going up with each other roughly around the beginning of 2009 in the so-called “reflation trade”. This premise is based on the idea that the Fed can create inflation at will, regardless of the dynamics of market activity. So far it seems to be working (or maybe not). I look at the S&P 500 as a general gauge to the US markets. Why don’t I look at the Dow Jones Industrial Average. Because it is only 30 of the largest US companies in market capitalization. It doesn’t represent the US markets as broadly as the S&P does. And if you want an even broader measure, you should take a look at the Wilshire 5000. The S&P 500 is good enough for me, because that’s where big money tends to play, and in the last few months the big money has been reluctant to add to their positions. Even with the declaration that the recession is over, the market has failed to move more than 8% in the last 3 months. Shouldn’t the market go up, now that the recession has been declared dead? You would think so. But markets don’t work like that. You need to be a contrarian at heart to make any money. And right now, there isn’t a whole lot of opportunities to go long because everything is up. And so far, we have been grinding and chopping for the last 20 days or so. It is my belief that markets will probably start heading down fairly soon, but I think it may be a long process before we finally reach the peak. So take a look at the small picture and then at the big picture. Two different perspectives on the same thing, huh? Exactly. For someone, just looking at the last year the market looks like a great investment. But for someone looking at a bit larger time frame, the market looks like a straight line in an almost vertical path. To believe the market is going to continue the same trend up, you must believe that that almost vertical rise since March 2009 will continue, no? So, if the trend does continue, the S&P 500 should be breaking the all-time highs in 2007 by the end of 2010. Likely or not, you tell me?

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