Thursday, May 7, 2009

Why is the market going up?

A friend, who never asks for advice, recently asked me “Why is the market going up?” The answer to his question was, "The market was not ready yet to go down.” There is too much cash on the sidelines waiting to get into the market and, until the market can attract a big chunk of this cash, it will not have a serious correction. Currently, based on information from the Investment Company Institute, there is about $4 trillion in various money market accounts.

“The bottom is in and everything is fine. It is time to buy stocks right?”. Seven weeks ago the markets were at 12 year lows, now everything is OK and it’s full steam ahead? How did we solve all of our problems in seven weeks? The price of housing has not stabilized as of yet. The #3 automaker just filed for protection under chapter 11 and the #1 US car company is probably going to file for chapter 11 protection in less than 30 days.

I said to you in a previous Blog (March 12) that I thought the Dow Jones would hit 8,500 and the S&P 500 would go to 900 before this rally in a bear market is over. No question we had a great April, we hit my targets on the close of Thursday May 6. By the time you read this Blog we may have already gone through the targets and started down. I would expect to see the markets move a little higher and then I would expect a scary sell off before the next phase of the rally begins.

It is not beyond the realm of possibility that the correction in the S&P 500, when it comes, could take us back to 800 to 810. As for the Dow Jones targets, look for a correction in the average of 7,700 to 7,800 levels. We will hang around these levels for a while then I expect an explosive rally from those levels perhaps to 1,000 or higher on the S&P 500 and perhaps as high as 10,000 on the Dow Jones. Talk about sticking you neck out in making a prediction.

It is this second rally that will bring in a great deal of cash into the market. This second rally may take till summer or fall to develop followed by a hard decline after this significant rally. The pivot point in the correction may be the resolution of the GM problem in late June. Watch the numbers.

Dan Perkins

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