Insights & Advice

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A Wall of Worry

There are any number of market watchers who are warning investors not to believe in this market’s move higher. They have been sounding alarms ever since we reached a bottom back in March. They are still cautious. As long as that attitude remains among investors you can bet the averages will move even higher.

The old adage that stock markets climb a wall of worry certainly applies in this latest market rally. Those who analyze fundamental variables such as company earnings, sales and management forecasts cannot find much to justify this market advance. On the macroeconomic side the economy continues to decline, unemployment increase and retail sales continue to disappoint. The most one can say about the economy is that it is falling at a decreased rate.

What many of these fundamentalists fail to understand is that the markets have already discounted these ominous statistics back in the first quarter of the year. It is what drove the S&P 500 to its year’s low of 666 in March. That’s why the market didn’t swoon when the government announced a 9.4 % unemployment rate on Friday, the highest number in 25 years. Instead investors focused on the decreasing number of layoffs. This week “only” 345,000 jobs were lost, which marked the fourth straight month that the rate of layoffs has decreased.

Take my loving wife, for example. She has been going on interviews and sending resumes out ever since she lost her job in Troy last June. She accepted her present condition but focused on the future. She never gave up hope. Thanks to her job search, she now knows Greene, Columbia, Berkshire, Litchfield, Rensselaer and Albany Counties backward and forwards. The good news is that she landed a job last week in Pittsfield. She is a statistic come to life and hopefully there will be more stories like hers as the economy begins to turnaround.

Now that doesn’t mean we are out of the woods quite yet. The economic turnaround will take time as will the employment numbers. As far as the markets are concerned, I do agree that they have had a great run and might even need to pause here (or even pull back 10-15%) before continuing their advance. We could easily spend the next two months or so churning back and forth in a trading range but one thing is sure. As long as the majority of investors continue to focus on the present rather than the future, the markets will advance.

Like you, I have been waiting for over a month for the S&P 500 to break the 945 level. Every time it gets within a couple of points of that magic number sellers appear. On Friday it reached as high as 951 for a second or two before falling back as traders sold stock at what technicians call “a strong resistance area.” I believe the bulls will continue to test and at some point decisively break through that level. If that occurs, many investors still waiting on the sidelines will go back into the markets.

That does not mean that I am sounding an all clear to jump back into the markets with both feet. Take a gradual approach. If you have been following my advice you already have a substantial amount invested. Invest some more if the markets pull back or simply churn around this level for a week or two. And remember don’t get too comfortable. I still maintain that we are in a “buy and sell” kind of market rather than a “buy and hold” environment. Nonetheless, there is money to be made. You should be prepared to participate in the coming advance. So what do you buy?

Commodity and basic material stocks, ETFs, and mutual funds should do well. I have also been recommending gold and silver for several months. I believe they will continue to advance. Technology and consumer oriented sectors will also remain a “hot” area. I think the easy money has already been made in the financial sector so investors should be a bit more discerning in what they buy among the banks and brokers.

On a personal note, I will be starting a new job in a week or two, which I will describe in further detail upon my return. Next week my wife, our 7 -month old Lab, Titus, and I will be taking a week’s vacation in Maine.

Posted in A Few Dollars More, At the Market