Monday, April 21, 2008

Stock Market: bull market since Jan. 22 lows

You already know why I thought the D-J Averages established a bottom on January 22. The market at the January 22 lows had discounted the worst that could be seen ahead, even as the bad news continued to fill the airways and newspapers.

What gives the Averages the incredible ability to "see the future," to discount what none of us individually can see? Ah, that's what's so fabulous about the stock market. The stock market is a compilation of what everybody knows about everything. And what everybody knows is far ahead of what any single person or any group or any collection of experts know. It's all part of what I call the "miracle of the markets," but what's also needed is the ability to interpret what the markets are telling us.

The most spectacular markets are those that are counter-intuitive. These are the markets that are "marching to a different drummer," markets that are rising in the face of bad news or falling in the face of bullish news.

The current market has been rising in the face of what experts many call "the worst economic news to emerge since World War II," and the market has been doing this ever since January 22. In fact the bank news and the housing news and the employment news has been so spectacularly rotten that most people have failed to notice what the stock market was doing. The first quarter of the year 2008 was a stock market classic, a textbook example of a market that is looking past the ugly news of the day.

The question now is -- "what lies ahead?" I think the action of the market will tell us what lies ahead in the economy. If the market stalls here, backs off, slips into a deep correction, it will be telling us that the road ahead for business will be spotty, difficult, and slow-going. If the market continues to move higher, if we start seeing expanding volume as stocks advance, then I believe the US economy will brighten rather faster than most people are prepared for. If the market turns sluggish and meanders sideways, then I believe it will be telling us that business will be doing the same thing -- just trying to "muddle through" as John Mauldin describes it.

You'll notice that most of the talk these days boils down to various experts and CEOs presenting their assorted guesses as to what lies ahead. You can see and hear their opinions on TV, you can read their warnings in the newspapers, you can monitor their guesses on your computer. But as for me, I depend on the markets to tell me what may lie ahead. The markets are the money. And I stick with that old adage that tell us -- "Money talks, BS walks."

I might also note here that the short interest on the NYSE has now climbed above 16 billion shares -- this is the highest recorded short interest ever. In order for the shorts to make money, they need a declining market, preferably a market declining on rising volume. So far, the shorts have not received that kind of a market. That means that we have a record short interest locked into a market that refuses to fall apart. A rising short interest in a market that refuses to head down is a potentially explosive market. My guess is that in due time the current huge short interest will be driven out by way of a rising market.

The big picture is for the Dow to advance to new highs in the months ahead (and it may take a year or so). If the Dow is fated to rise to new highs, the Dow will take a large number of stocks with it. The further implications of this will be that the US economy will be due to improve, and very possibly to boom in the period ahead. In fact, I expect this bull market to end with an unexpected bullish explosion in both stocks and the US economy.

I have no idea what might cause such a boom. The stock market has its secrets and its remarkable intuitive and discounting powers. The stock market can tell us what, but it never tells us how or when.

What about the primary bear market that will inevitably follow when this greatest of all bull markets finally tops out? Ah, that's another story, and it will not be a pleasant one. At this point I associate the next bear market with the US dollar's loss of its reserve status.

From: DowTheory RR


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