Tuesday, April 14, 2009

The Recent Market Rally: What Comes Next?

My forecast at this time is as follows:
I believe we are in a cyclical bull market, with the potential for the S&P 500 index to reach 1100-1200 over the next eighteen months.  Like any period of time, markets seldom move in straight lines and this potential upward trend shall likely prove no different.
The unprecedented government spending and related record deficits and a potential increase in inflation may likely become the next ticking time bomb, as we get closer to 2011.
It was only weeks ago that consumer/investor confidence was extremely bleak.  Now, with the recent 26% run-up in stock prices, investors, financial advisors and the media are in a much better mood.  The problem is that, fundamentally, not that much has changed in the past month, other than:
  1. The politicians in Washington finally figured out that paying attention to the 50% decline in the stock market is something that the majority of Americans want them to pay attention to.
  2. From a technical standpoint, many stocks, on a valuation basis, had reached very low valuation levels, to the point that like a magnet, money from the “sidelines” got pulled in to take advantage of the “blue light special” that many stocks were offering.
At this point, based upon the recent run-up in stock prices, it is very important to not chase returns and to maintain some cash on the sidelines should the current run-up reverse its course and decline 10% or more from it’s recent high.
Investing lesson: The cyclical trend is most likely upward over the coming 6-18 months, but this journey will be filled with many ups and downs, which is how the stock market works.

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