But wait! Aren’t the bulls on firm footing?
Of course the bulls in this market will point out the near 70% gain we have seen since the March 2009 lows and will tell you this is signal that the economic conditions are improving and will continue to do just that. Maybe, but we don’t totally buy it. What they are saying is that “it’s business as usual.” For Wall St., business as usual means the “all-clear bell” has been sounded.
Do you really think we should believe that? In fact, at this juncture here in the stock market, this rally should give you even more reason for concern. Stocks cannot be considered “cheap” anymore since they are trading at over-valued levels by some 25% based on long term price to earnings ratios.
Stocks have been on a steady climb for the last year and are at high valuations as they were back in 2007, you know what happened then. Now we are not calling for Armageddon all over again but the bulls better be careful here. Then again, we know how these liquidity driven markets eventually end, in a bubble, bursting. Even the Fed in their latest FOMC Minutes released on April 6, 2010 said they are keeping their eye out for speculative bubbles in stocks and other asset classes.
As we have said before, regardless of how strong the economy gets, the stock market is pricing in a perfect economic recovery and it just can’t happen. In our view we think this rally could come to a grinding halt at any moment and begin the correction we think is very much overdue.
What Happens When the Government Stops Supporting the Economy?
At ProfessionalStockTraderLive.com our biggest concern is that there will not be a "normal" recovery due to the lack of job creation, period! Without the government stimulus packages and such weak job creation, where does a sustained recovery come from? The reality is up to this point the so-called recovery and rally in the stock market has been facilitated with taxpayer dollars. Trillions of dollars have been pumped out by Washington DC and the Obama Administration to try and stimulate the economy.
Currently the federal government accounts for almost 25% of the USA’s economy. Wow, that sounds like a real recipe for sustainable growth doesn’t it?
Back in the Great Depression, even with massive government spending under FDR, government spending topped out at slightly over 10%, a far cry from where we are now.
If we continue to spend and the deficit continues to rocket, we could be in serious danger of even having our debt rating reduced sometime down the road. I know it is unthinkable - but why not? At some point, if the spending continues, there will be some very serious unintended consequences.
Once the stimulus packages stop from the government then what? Can we really see a sustainable economic recovery? Or will we find ourselves pushing back into a recession and once again have the government bring us back from the dead? Since many of the government packages are nearing an end we may have our answer sooner rather then later!
A few warning signs that we believe should not be overlooked:
- Stock market cycles suggests we could be in for some trouble: a 10-year market cycle (10th year of a decade) and a midterm election year cycles come into play in 2010:
- The decennial (10th year of a decade) cycle indicates that years ending in zero tend to be the worst stock market performers of the decade. This is simply a historical fact. From the 1880s through the year 2000, the tenth year of the decade has produced an annual average LOSS of 7.2%. This is going all the way back to the 1880’s.
- Midterm election cycle years have posted the second worst performance of the four-year president cycle. With 2010 being a midterm election year, historical performance is not in favor of a continued rally in the market.
Since 1930, stock market corrections have averaged nearly 21% at some point during a midterm election year. We are not suggesting that is going to happen but simply pointing it out as a matter of fact. So far in 2010, the biggest correction we have seen has been the 8% pullback back in Jan/Feb 2010 timeframe.
With an overwhelming amount of hatred on both sides of the aisle, this could make for a real ugly midterm election, thus giving us plenty of uncertain times ahead.
- Riskier stocks are leading stocks higher; of late the garbage stocks and higher risk stocks are exploding on up. Way too much risk is coming back into the market and way too much complacency is back on Wall St. and Main St.Leading Indicators Are.
Lagging (LEI); they have been lagging for the past several months. This could change but for the time being it is a bad sign. The average work-week, building permits and initial jobless claims all have has been less then stellar of late.
Since late November 2009, we have been teaching our members in our nightly video updates and daily live webcasts to be vigilant in this complex market environment. While we believe we can have further rally efforts towards the major resistance levels, S&P 500 1228.74 (61.8% Fibonacci retracement level) and DJIA 11245.95 (61.8% Fibonacci retracement level), we are quite aware of the factors we have discussed above. Because of this, we will be teaching our members in our real time setting how to identify a market turn and how to hedge their overall portfolio as well as how to put on shorts positions with excellent risk/reward ratio setups. Currently, many of our members are coming into our real time trading environment and asking us to show them how to still day trade and profit in this overbought environment while limiting their risk.
Regardless of how you play the market, at ProfessionalStockTraderLive we always preach for you to use patience, discipline and stops.
