Tuesday, October 14, 2008

Stock Market Rallies Like It's 1932

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Increases in liquidity show up in the stock market immediately and in the economy months later, but are not fully reflected in the inflation rate until years later. Yesterday's promise of UNLIMITED liquidity for the banking system in Europe (backed up by the U.S. Fed) along with the announcement of several trillion dollars in financial company bailout programs created the biggest global stock market rally ever. The future effects on the global economy remain to be seen. The likely biggest global inflation ever will not be showing up for awhile.

The Dow was up 936 points yesterday or 11.1% to close at 9387. The S&P500 was up 104 points or 11.6% and reclaimed the 1000 level by closing at 1003. Nasdaq rose 195 points to 1844 and was up 11.8%. Small caps, which have held up better than any of the other indices saw the smallest rise, with the Russell 2000 up 48 points or 9.3%. Before the rally, the Dow had fallen 40.3% from the high that it had reached on October 9, 2007 (a bigger percentage loss than in the 2000 to 2002 bear market) and had fallen eight consecutive days for a loss of 22.1%. While the points gains were impressive on Monday, the volume was nothing to write home about. Nasdaq only managed to break just above its average daily volume level at the close. Volume on the Dow was more enthusiastic, but not spectacular. Although yesterday's point rally in U.S. stocks was the biggest ever, in percentage terms it was not. Comparable and even bigger rallies took place in the U.S. during the 1930s Great Depression, but have not been seen since.

A rally of similar magnitude to the one in the U.S. took place in the world's other bourses as well. In Europe, the FTSE 100 in the UK was up 8.3%, the CAC-40 in France up 11.2% and the DAX in Germany was up 11.4%. The Hang Seng in Hong Kong rallied 10.2%. Japan was closed on Monday, but got two days of rallying in by rising 14.2% when it reopened on Tuesday. The Nikkei was trying to test test its 2003 low (which took 12 years of selling for it to reach) of just above 7600 last week. If it can manage not to break it in the next few months, the Japanese stock market may finally have bottomed after almost two decades.

Options expire this Friday and the current rally is likely to be sustained until this support for the market runs out (since August 2007, options expiration week has been the time for major stock rallies in the U.S). Today is already starting out as another big day for stocks, but be ready for any possibility. Extremely big rallies, which are typical of bear markets, are not necessarily good news. They certainly weren't during the Great Depression.

NEXT: So Much for That Rally

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

1 comment:

CJ said...

Excellent, insightful, well balanced comments. Always looking forward to your next post. Thank you.