Great Stock Market Performance, But Will Dow 9,200 Hold?

by Silicon Valley Blogger on 2009-07-3112

Thoughts on the Dow Jones over the 9,000 mark.

Stock Market Performance: Any Cause To Rejoice?

At the beginning of this month, I wrote an article inquiring whether the economic downturn was over. I wrote about the use of an interesting economic indicator that could herald the end of the slump if you take stock of what some economic analysts are saying. That indicator is the jobless claims number — once it peaks, then falls, it’s supposed to signal the bottom of the recession — and as they say, there’s nowhere to go but up!

But that article attracted a lot of cautious responses. People told me to “listen to my spouse” who continues to be skeptical about all this talk of recovery, and who still believes that we’ve got a ways to go with this recession. His view? Got to wring out all the negativity that’s still weighing upon the fundamentals: massive deficit, foreclosures and bad loans, loan defaults, tottering banks, unemployment.

Reviewing The Economic Fundamentals

These last few days though, there appears to be (at least, on the surface) some kind of turning point in the U.S. market psychology, since we’re suddenly seeing the Dow Jones sitting above 9,000 for the first time in 9 months.

The mainstream media is now reporting that the indexes are at their highest levels in 9 months, and what can we attribute this action to? Supposedly, there are three factors:

  • A drop in jobless claims (hey, wasn’t that the indicator I was just talking about?),
  • Improved profit reports from companies,
  • More confidence in the status of the world economy, particularly that of Asia.

So what do you think? As they say, stock market behavior and performance can be harbingers of things to come, particularly with the economy. When the market turns up after a significant weak spell, it may be the sign of an economic turnaround in the near future since stock market trends are said to track the economy some 6 to 9 months in advance. The question here is whether we believe that the fundamentals are improving enough to merit a 9,200 in the Dow Jones, or a 986 in the S & P. My guess is that there are still a lot of you out there who aren’t quite convinced that we’re out of the woods just yet. Here’s why: just take a look at how the U.S. debt has ballooned over time (source: check out this article for more on this sordid matter).

US debt

We’re still facing the issues of debt and defaults, and their serious, lingering after effects. Our nation’s financial woes don’t seem like they’re going away anytime soon. So if you acknowledge the underlying fundamentals from this vantage point, then you’re likely to believe that this rise in the market is going to turn out to be one more meaningless bounce in the big scheme of things.

How High Can The S & P Go? Technical Analysis Predictions

But how about we take a peek at what technical analysts are saying on the other hand: since they provide short term reads of the stock market through charts and indicators; their calls are meant more for active investors and traders (those who market time). For the short term, stock traders are seeing a continued bias to the upside based on a potential chart pattern formation called a “head and shoulders” bottoming in the markets that has developed over the past 9 months. For more insight into this, check out the video below to get the perspective of one experienced analyst.

Click this link or the image below to watch the video:

S & P index high 9200

The premise of this video is that there is an opportunity here for the S & P index to hit the 1,200 level (with a minimum target of 1,000) from the current 980+ level. Again, to appreciate this information, you’d have to buy into the teachings of technical analysts, stock traders and chartists. For more on this type of investment focus, check out our posts on how to trade stocks using stock charting tools and stock trading software.

I quake under the enormity of our nation’s situation as I try to grasp the significance of our massive debt problems. So while I’m happy that some of my investments look like they’re recovering quite nicely as they ride the latest market surge, a part of me is bracing for more volatility ahead. And if this market looks any better soon, I may be strongly tempted to lighten my U.S. investment holdings at higher levels (yes, I may just acquiesce to the forces of market timing) as we readjust our portfolio towards a more conservative bent: after all, we’re not getting any younger!

What’s your take on this upward trend?

Copyright © 2009 The Digerati Life. All Rights Reserved.

{ 12 comments… read them below or add one }

J. Money July 31, 2009 at 6:41 pm

I think the tables are starting to turn! I’m not one to research and look at a lot of data, but what goes down must come back up and I’m feeling pretty optimistic 🙂 At least, that’s what I *want* to think, and I’m pretty happy with that.

MoneyEnergy July 31, 2009 at 8:59 pm

I agree with your main points…. it’s nice to see the higher levels, but if the fundamentals haven’t improved much, how sustainable are these levels, really? And the gains won’t mean much if they’re met by USD inflation. I think the best thing is to always keep some cash aside for when we *do* see unexpected big drops on purely circumstantial reasons – and to invest in the less favored sectors at any given time. So if we’re in a more favourable risk environment, take a look at some of the “defensive” stocks to see if they’re trading cheap, and v.v. The last 9 months taught me that these defensive stocks really are a welcome presence in my portfolio, and I should have more of them.

Bret July 31, 2009 at 11:09 pm

I am thrilled my investments are coming back. But, I am very cautious this will be sustained in the near term. The heavy debt and intrusive nature of our Government can only create a big drag for business and the economy.

Having said all of that, the long-term valuations in the stock market are tied to earnings, not technical indicators. If earnings keep growing at the strong rate they have recently, valuations in the stock market will have to improve over the long term.

Dorian Wales August 1, 2009 at 3:38 am

The trend is definitly our friend on this one. Dollar cost averaging is a good way to start dipping a leg into the pool ….

Monevator August 1, 2009 at 4:08 am

Remember that unemployment is a lagging indicator – it will continue to rise after the recession has troughed. To an extent it’s a good sign for quoted companies as it shows how they’ve cut costs and can be expected to see better profits, although it depends on how their markets have been hit by the unemployment, of course.

But anyway, as we’ve discussed over on Monevator I think from a long-term perspective the market has to be seen as a buy at the moment. Sure it may go down 25% again, but we’re well below 10 year highs. That’s a very bullish sign.

Re: That national debt, true, but where else will you put that money. In the worse case the authorities will have to inflate away the debt. In that case you don’t want to be in cash or fixed bonds, that’s for sure, but rather TIPS, stocks, commodities and perhaps real estate.

Good luck! 🙂

Goran Web Design August 1, 2009 at 5:16 am

This turn isn’t going to last very long…..I see that AIG is teetering on the brink of collapse after the bailout ot $182 Billion. Check this article.

When the giants are folding, beware the stock markets. They’ll feed you false information to up their share price, and sell off for a profit, before collapsing.

Rob Bennett August 1, 2009 at 5:29 am

I put a post to a Motley Fool discussion board on May 13, 2002, pointing out analytical errors in the studies that retirement planners use to help us plan our retirements. These errors caused the numbers in the studies to be wildly off the mark. A good number of people expressed a great deal of interest, but a larger number were dead-set opposed to the idea of permitting discussion of the issue (numerous big-name experts have since confirmed that I was right). Honest posting on this question has been banned at numerous boards and at several blogs at which I have posted.

I believe that the market will improve once the emotional issues that are the root cause of the crash are addressed. We have collectively lost confidence in the market because on some level of consciousness we know that the things that we have been told about how the stock market works (that stocks are always a good buy regardless of the price at which they are selling, that timing the market is never a good idea, etc.) simply cannot be so.

There has been improvement since the crash. People are more open today to hearing the realities than they were a year ago. But I don’t believe that a prolonged period of economic growth can be sustained until we acknowledge to ourselves what we have done to ourselves and work up the courage to begin a rebuilding process. Insane bull markets come with a big price tag attached. My sense (going by what has happened in the wake of earlier insane bull markets) is that we have today paid about half the bill.


Kosmo @ The Casual Observer August 2, 2009 at 8:10 am

I started a contest on The Casual Observer back in April that pitted 3 personal finance bloggers against three non-PF bloggers in a Dow prediction contest. It’s here ->

There is a link within that article to the original April post that includes that logic that was used to reach the guesses.

I’m not a PF blogger, so this was just more of a “fun contest” sort of thing.

Tunes August 2, 2009 at 10:12 am

The schedule is encouraging … but given the current state of world markets, I would not make hasty conclusions.

Scott Lovingood August 4, 2009 at 8:00 am

Well I started typing a reply to this and when I got to word 500 or so realized it would be better as a separate blog post. I have linked back to your article and written my comments on my blog 🙂

I also included a few links to some good resources for people who want to deepen their understanding of the stock market.

have a great day

said August 26, 2009 at 9:37 am

The trend is definitely our friend on this one. Dollar cost averaging is a good way to start dipping a leg into the pool ….

Story Stocks September 14, 2009 at 11:26 pm

I for one wonder that if the jobless data doesn’t start to improve significantly soon if the rally can last! Where are the jobs?

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