Insights & Advice

|

Stocks Want to Go Higher

It was another week of battle between bulls and bears. Despite continued bad news however, the markets make head way one grudging step at a time. As it does, more and more investors who have been watching nervously from the side lines will begin to put money in the market. When enough investors are committed the true test will come.

Certainly the government is sparing no efforts in trying to entice investors back in the market. The historic interest rates cut by the Federal Reserve Bank this week (see my column (“Are You ready for this–0%, down, 0% financing?”) gave investors a big boost, which was reflected in the 4%- plus move in the averages on Tuesday. The Discount rate was cut half a percentage point to .50% while the Fed Funds rate was reduced to a range of 0-.25%. Investors also cheered the Fed’s announced intention to expand lending and security purchases in whatever way they see fit to “employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.”

That’s pretty strong stuff. It had an immediate and beneficial impact on mortgage rates which dropped to 5%, a historic low in this country. Not to be outdone, central banks around the world cut interest rates a day later. It was pretty hard for even the perma-bears to find fault with those moves.

Of course, those actions were bolstered by a ‘leak’ from some Obama insiders who indicated a stimulus plan of as much as $850 billion would be ready for the Hill to review as early as January 1. That way, it was explained, Congress will have more time to examine and debate the president-elect’s ideas on a rescue plan before he takes power. If true, the pace and scope of Obama’s economic proposed plan would rival anything we’ve seen since the Reagan Revolution.

So how does all this impact your bottom line as an investor? If you recall, I have been advising readers over the last few weeks to begin buying income and interest bearing mutual funds. As interest rates drop lower and lower on government bonds and their prices soar, investors are finally beginning to look at riskier investments such as high-quality, corporate bond funds, blue chip dividend paying stocks, preferred funds and even high yield junk bond mutual funds. I still believe those are good investments.

Today (as well as yesterday’s close) the markets have been extremely volatile. Much of that movement can be explained by an event called “quadruple witching hour” that occurs just four days a year. It is the day when stock index options, stock index futures, stock options and single stock futures expire. Traders jockey for position buying and sell puts, calls and baskets of stocks as they square positions and make new future bets on securities.

The long-delayed bail-out of Detroit finally occurred as well. Before the opening bell, President Busch announced that the government would loan GM and Chrysler $13.4 billion from the first tranche of $750 billion government bail-out fund. Another $4 billion will be available once the second bloc of those funds (the last $350 billion) becomes available. However, there were strings attached. The loans are short-term and can be recalled unless the companies can present a viable restructuring plan no later than the end of March. The news gives the two auto makers some breathing room (Ford said it doesn’t need the cash right now) but I fear this will only be round one in a protracted fight for survival.

Next week begins the holiday season among much of the world’s markets. You can expect volume on the exchanges to dry up and hopefully a reduction in volatility but don’t count on the latter. Traditionally the markets have had an upward bias during the final two weeks of the year. There is a counter case that argues investors will use the time to sell and book some tax losses but I suspect there has been quite enough selling in 2008 for all of us. Maybe stocks will do nothing. Wouldn’t that be a welcome change?

As I said two weeks ago, the market feels to me like there is more upside ahead. The question I ask myself is whether this rally will turn out to be another bear market bounce or will it “have legs” as they say in the trade? I expect the answer lies ahead, somewhere between 1,000-1,100 levels on the S&P 500 Index. If it can break that level on the upside, I will breathe a long sigh of relief. Fortunately that’s still over a hundred points higher so I have at least until the New Year to make up my mind.

Posted in A Few Dollars More, At the Market