The Correction Within the Current Bear Market Rally: Will It End Soon?

And so the S&P 500 Index is trading right around a key resistance level of 1,220 and, if it can prove to hold above this level, this could be the breakout the market’s been needing. It’s been a tough go for the stock market over the last several weeks and we’re due for a little upside.

Bear Market

Along with more certainty on the sovereign debt issue in Europe, corporations now have to step up to the plate and deliver on earnings. Other than the financials, we’re seeing good numbers so far from big, brand-name companies—especially in technology, which is refreshing. In the last several quarters, the technology sector was a big disappointment, especially at the retail level.

Although the spot price of gold is somewhat being held hostage by the strength in the U.S. dollar, large-cap gold stocks are very attractively priced at this time and I think the marketplace has created a good entry point for new positions in this sector. I would also consider new positions in oil at this time. The spot price is ripe for an upward move as investor sentiment improves.

All this market needs is a little more certainty on Europe and the economy. It doesn’t need a lot of reassurance—just a little. With this improvement, stocks can rally throughout the fourth quarter and we could finish off the year with a nice little gain.

Helping the cause is the fact that the stock market is fairly valued currently and that a lot of reduced expectations for economic growth have already been priced into the market. Institutional investors have been chomping at the bit to buy stocks in this market, but they’ve been waiting for a catalyst. It’s possible that the catalyst won’t be anything definitive, but rather just a reduction of investment risk (caused mostly by the debt crisis). Everyone knows that the world is awash in debt and so does Wall Street. For the most part, Wall Street is okay with this, because they are used to operating in a world of debt and leverage. All capital markets require is a clear and actionable plan, with a time table, from European policymakers, and a lot of certainty will be restored in global capital markets. This doesn’t mean that Greece won’t default on its sovereign debt, but financial markets need to know that the rest of Europe and the world will stand behind a real restructuring plan for that nation’s finances.

Like I say, the broader stock market is going to face some resistance around 1,220 on the S&P. If corporations come through on earnings and visibility, and the debt crisis gets under control, I see no reason why the main stock market averages can’t pop higher by a solid 10% before the end of the year. The correction within the primary trend (a bear market rally since the March 2009 low) may soon be at an end.

Stock Market & Gold: An Opportunity Like We’ve Never Seen Before?

By Michael Lombardi, MBA

I’m so excited this morning; I can hardly control my excitement.

Being the type of person who looks at the glass half-full as opposed to half-empty, I see yesterday’s sell-off in most investment categories as presenting investors with huge opportunities for profit.

Let’s start with the stock market: Since August, there have been five breakdowns by the Dow Jones Industrial Average to the 10,500 level. Subsequent to each of the downside moves, the stock market has rallied. As of last night’s close, the Dow Jones Industrials are selling at only 12.2 times this year’s earnings! The Dow Jones Industrials offer a dividend yield today of 2.9%—trumping most other forms of investment in respect to income.

The stock market is severely oversold; there is great value in stocks.

Moving to precious metals, the big correction in gold and silver I have been predicting and warning about is on! Finally, gold’s back under $1,700 an ounce. Finally, silver is back under $33.00 an ounce.

If you believe that the world’s financial problems will go away, if you believe that the U.S. will get out from under its mountain of debt, sell your gold.

On the other hand, if you recognize that gold bullion has risen $397.00 an ounce in the past 12 months (31%) and investors are finally taking some profits off the table, if you believe that the world’s economic problems will only get worse, that the U.S. will continue piling on the debt, that U.S. dollars will continue to be printed at a rate that spurs inflation (all the stuff I believe), then you might want to take this opportunity to buy more gold investments (like I am).

Global Stocks Enter Bear Market,” said the headline on a Bloomberg news story yesterday. Investors are panicking again and stock advisors are at the most bearish level in months. When you see this amount of negativity, stocks usually go the other way and climb the wall of worry higher. Stock market rallies end when investors are most optimistic, not when they are as pessimistic as they are today.

Michael’s Personal Notes:

Shares of Warren Buffett’s Berkshire Hathaway Inc. (NYSE/BRK-A) are trading at $100,000 for the first time since the beginning of 2010. I believe there are two reasons this is happening and I don’t believe the price action of Berkshire stock is indicative of the future of general stock prices.

First of all, the company’s reinsurance units have taken a hit. Japan’s earthquake in March and the U.S. windstorms this year have resulted in Berkshire Hathaway Reinsurance Group taking a loss in the first half of 2011.

Secondly, as the company has grown so much, it’s just getting tougher to make deals with big returns. Most of Buffett’s bets have been secure ones: buying preferred shares of big companies and getting a small of amount of warrants as a bonus. The bigger Berkshire has become, the more difficult it has become to make deals where the eventual returns are substantial. Berkshire will be hard pressed to find a deal like Coca-Cola again.

Where the Market Stands; Where it’s Headed:

Despite yesterday’s sell-off in stocks, I believe we continue to be in a bear market rally in stocks that started in March of 2009. Yes, the rally has been long and is getting tired, but I believe the bear market rally has more upside potential left.

What He Said:

“Partying Like a Drunken Sailor: The party continues. Stocks are making new highs and people are spending like there is no tomorrow. Why? I really don’t know. Big (cap) stocks, they just continue going up. Wall Street bonuses are at record levels. Popular consumer goods are flying off the shelves. Designer clothes, fast and expensive cars, restaurants with one-hour waits…people are spending in America today at an unbelievable clip. 1932, 1933…who remembers those years? The depression of the 1930s was the biggest bust of modern history. 2005, 2006, 2007…welcome to the biggest boom of the same period. When will it all end? Soon, my dear reader. Soon.” Michael Lombardi in PROFIT CONFIDENTIAL, February 7, 2007. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.

Inflation at Almost 5%…Is It Any Wonder Dollars Buy Less and Less?

Gold prices rising for 10 years straight…the money supply greatly expanded…the printing press for dollars running overtime…am I the only one concerned about rapid inflation?

I rarely read or hear a report talking about today’s rising prices or the hyperinflation we may sustain in the years ahead. We all know prices are rising—only housing prices have remained low. Inflation is real and it is here now.

The U.S. consumer-price index (CPI) increased 0.4% in August. That’s an annual inflation rate of 4.8%! Why are we not hearing and reading more about this? The only vocal entity on inflation has been gold bullion. The rise in the price of gold is shouting, “Inflation ahead!”

By keeping interest rates so low, by increasing the money supply, the Fed is spurring inflation. And that’s what we all want: inflation, not deflation. So the Fed has us pointed in the right direction. The trick for the Fed will be eventually bringing interest rates up ever so gently when inflation starts to get out of control.

Unfortunately, consumers are suffering from inflation today. Retirees who will not accept risk with their investments are stuck with 10-year Treasuries paying a measly two percent. With inflation at 4.8%, consumers’ money is losing 2.8% of its value over 12 months.

Inflation is a problem today, my dear readers, and it will be a bigger problem tomorrow. Keep the gold investments. They’ll be even more valuable as time passes and inflation really takes hold in this country.

Michael’s Personal Notes:

Jobless claims rose by 11,000 to 428,000 last week—the highest level since June, according to the U.S. Labor Department. Wow! Jobs continue to be a big economic problem in this country. Bank of America (NYSE/BAC) is the latest large company to announce major layoffs plans.

Until employment in this country gets back on track, the housing market will not recover. And until the housing market recovers, the economy will continue to be anemic. That’s simple economic analysis.

I’ve been thinking more and more about Obama’s American Jobs Bill and I don’t believe it’s the answer. It will just add billions to our debt burden.

The answer, my dear reader, the answer to creating old-fashioned jobs in this country, is capitalism and entrepreneurship. That’s what created this great country in the first place.

Drastically lowering taxes will create jobs. A flat tax across the board—say 20% or 25%—with a valued-added sales tax on the purchase of items, like they have in countries such as Canada, is the only way to really get the economy going and to create jobs. Unfortunately, the Obama administration has never put forth any such proposal.

Where the Market Stands: Where it’s Headed:

We are in a bear market rally that started in March of 2009. While 30 months’ old and tired, this bear market rally has more life left in it. I believe that the rally will push stock prices even higher, as the bear lures more investors back into the stock market.

What He Said:

“As investors, we need to take a serious look at our investment portfolios and ask, ‘How will my investments be affected by an American-grown recession?’ You should take what precautionary steps you can right now to protect yourself from a recession in 2007. Maybe you need to cut your own spending or maybe you need to sell some stocks that will take a beating during a recession. You know what tidying up you need to do. Don’t procrastinate…get to it now. And please remember: Recessions can happen quickly, stock markets don’t go up during recessions, and the longer the boom before the recession, the longer the recession. Just based on my last point, we have plenty to worry about in 2007.” Michael Lombardi in PROFIT CONFIDENTIAL, November 13, 2006. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.