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.We’re Still in Correction Mode
Beware of Greeks Bearing Bonds
On January 24, 2010, in our post entitled, “Tsunami of Selling Signals Market Correction,” we indicated that a stock market correction had begun. We still hold to that view. The DJI Average hit a high of 10,725 in mid- January and today closed at 10,012 after a nasty bout of selling. That equates to a drop of 6.6 % in two weeks.
We believe this correction isn’t quite finished and has a little more to go on the downside. Our best guess — another two hundred points down to about 9800 (DJI).
The reasons for the decline are both old and recent:
1. China has given a clear signal that it is in the process of removing liquidity from it’s banking system in order to cool it’s economy. Keep in mind that China is now the second largest economy in the world.
2. Tougher banking regulations are coming from the United States Congress but it is still unclear just how tough they will be.
3. The market became rather expensive after the huge run-up in 2009. Profit taking has been underway and is likely to continue for a bit longer.
4. The latest worry comes from Europe. Serious sovereign debt problems are looming in Portugal, Ireland, Spain and Greece. Greece’s problems are the biggest concern. According to Friday’s Wall Street Journal opinion page, “The country for too long lived far above it’s means, and then lied about it by deliberately misrepresenting it’s public finances.” A really big no-no in the eyes of the world!
All is not doom and gloom, however. The positives are:
1. An unexpectedly, positive report by the Commerce Department on January unemployment. The Unemployment Rate dropped to 9.7% when expectations were for a slight rise above the prior 10% rate.
2. A healthy increase of 52,000 in hirings for temporary workers. This was the fourth monthly increase in a row. January also saw a slight increase in hours worked to 33.3 hours per week. These are early signs that employers may start hiring more full time workers in the months ahead.
3. Commodity prices have fallen sharply in recent weeks. That will keep inflation under control which will keep interest rates down and, in turn, will provide a favorable environment for economic growth.
4. The recently reported fourth quarter GDP growth rate of 5.7% is abnormally high and will very likely be lower (3% to 4%) in coming quarters. Nevertheless, we now have two back-to-back quarters of positive GDP growth, a clear sign of a recovering economy.
What to do now?
Every investor has different investment objectives and a different risk tolerance. With that in mind, we offer the following:
Short Term From a short-term standpoint we think it’s prudent to raise some cash and lower one’s market risk a little. We do not believe you will miss much on the upside during the next month or two.
Longer Term From a longer-term (approximately 2-year viewpoint), we believe the bull market is not over and will still provide some good portfolio gains. Therefore, we continue to recommend a diversified portfolio of solid, blue chip securities for those willing to assume some risk.
However, do not expect large gains similar to what we saw in 2009. Historically, the first six months of a new bull market usually provide the greatest gains. Last year the DJI rose 59% and the SP-500 gained 65% from the mid-March lows to year end. That period is now past. Expectations should be lowered to more reasonable returns such as 8% – 10% per year for the DJI and SP-500 indices.
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Disclaimer:
StansTake.com is not a registered investment advisor. Nothing contained in any of this material should be construed as a recommendation to buy or sell securities.
Opinions or suggestions are given with the understanding that readers acting on information herein assume all risks involved.
In addition, we highly recommend that readers do their own investment research or seek advice from registered investment advisors on subjects commented on above.
