Dale,
I'm not writing this post out of disrespect for you because this is my first encounter with you on SI and I don't know you. But I find it totally absurd to believe that the DJIA will decline below 5000 before May. Yes, the market averages have gone up substantially over the past few years. But there are good reasons for it and I don't believe it's over. Stocks don't go down just because they have gone up, nor do they go up just because they have gone down.
An important note is that I try not to worry about the market averages and instead focus on the technical behavior of individual stocks. But I'm human, and sometimes bow to the pressure like others. An example is IFMX which I bought at 7 1/8 on Thursday (April 10) with a target of 8 to 8 1/2. I got nervous because the market was crapping out and sold my stock at 7 17/32 yesterday. I still banked a one day profit of 6% on that trade, but I sold a stock that looked good technically simply because the market averages didn't look good. As it turned out, the stock rallied to an intraday high of 7 15/16 after I sold it--very close to my target of 8 and I suspect that it will reach at least 8 1/4 on Monday or Tuesday. My point is that some stocks go up and some stocks go down ever day. Even if you are correct in your prediction of DOW 5000 by May, I disagree with your recommendation to "exit this market on strength" because you have implied that all stocks will decline.
While the rest of this post if filled with fundamental reasons that justify a continued market advance, I am a technician at heart and trade primarily on technical indications. I agree with you that the market averages will correct periodically, but I don't think a crash is likely at this time because interest rates are far too low to cause a mass exodus from stocks. For the market averages to crash, money would have to leave the market entirely instead of moving into other stocks as is now the case. If you recall, interest rates were over 11% when the market crashed in Oct 87 and they had been rising for quite some time. The yield on the 30 year treasury bond is now at about 7 1/8%. This is low based on historical standards and quite far from a yield that would cause the DJIA to decline to 5000 in the next month.
Here are the fundamental reasons why I don't think the market will crash.
1. World inflation remains relatively low.
-----a. Technology - We are in the midst of a technology revolution unseen since the 1700s and 1800s. Advances in technology are allowing companies to produce more goods and services at lower costs, increasing the supply of products on the market.
-----b. Demographics - Many people have turned from spenders to savers, lowering demand for goods and services.
----c. More supply in the market (item a) coupled with lower demand (item b) means continued pressure on prices.
----d. Competition - There are too many suppliers for the same goods and services and the competition alone is forcing prices down in many sectors of the economy--especially retail.
----e. Global standardization - The trend towards adopting commercial standards is expanding many markets--increasing the supply of products available, and keeping prices down.
2. Rising corporate profits
-----a. Production - Companies are producing more goods and services with less labor than ever before. There are many reasons for this, including technology, standardization, and a global economy. This lowers costs and increases profits.
-----b. Global economy - Companies are using labor and products from all over the world more than ever before and this is keeping costs of goods sold down and profits up.
---c. Technology - Advances in technology are giving companies alternative ways to conduct business, saving them significant amounts of money. Examples: Instead of flying to meetings, many companies use video conferencing saving airfares, hotel bills, rental cars, and per diem; Deregulation of the telecommunications industry is dramatically lowering the costs of long distance; The Internet is saving companies a lot of money in areas like communications, advertising, and distribution of products.
My conclusion is that low inflation coupled with rising corporate profits will be the catalyst for a bull market that will surprise many people. I agree that corrections will occur, but a market crash is unlikely at this time. And even if the market does go down substantially, I don't advocate going entirely to cash. There are always stocks to buy and stocks to sell.
Thanks for taking the time to read another viewpoint. You made a great call on the end of the rally the other day. I hope you made money trading index puts. :o)
Dan |
