Friday, March 27, 2009

In the Eye of the Financial Hurricane

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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There is some effort to talk down the current rally by the media today (assume the shorts have planted the stories). This doesn't mean the rally is going to end at the moment however. The momentum is very strong and doesn't seem to be have been dissipated yet, so no need to rush out and sell anything. The rally will end however and be followed by a sharp drop, possibly to lower lows. The current rally is very much a Bear Market rally and these differ in a number of ways from the beginning of a new Bull Market.

The money has been very easy in this rally and that is a common marker of Bear Market rallies. Prices move up very fast and seemingly without restraint. In contrast, beginnings of new Bull Markets are usually a struggle. It took about 10 months to put in the base at the bottom in 2002 and 2003 (the current bottom has had about a 5 month base put in so far). The market did not just shoot straight up out of that base. The bulls and bears battled for control on almost a daily basis with the bulls being able to only gradually move the market up. That type of constant give and take allows rallies to last a long time - about 10 months in 2003/2004. The current move up is almost effortless and because of that it can burn itself out pretty quickly.

The current rally has also been led by the biggest losers of the downturn - the financials. This is typical of bear market rallies, which are mostly short covering affairs. Once enough of the shorts close out and prices rise a lot, new short positions are put on that drive prices back down. The only thing that has made the financials more valuable is that the government is willing to put more taxpayer money into their coffers. Their value is no longer determined by economic forces, but corporate welfare payments. Not exactly an enticing long term economic model for investors.

There are three things for the current rally that need to be watched closely - resistance, earnings season, and April 15th. All the major indices are about to enter a strong band of resistance. For the Nasdaq, this starts at 1600 and goes to around 1650. The Dow has strong resistance at 8300, with with more resistance around 9000. For the S&P 500, there is resistance between 870 to 940. These are levels where the rally is likely to run out of steam. Another limiting factor to the rally is that first quarter earnings season starts around April 7th. Rallies into earnings usually mean a sell off after - and sometimes even during. As for April 15th, people frequently sell investments to pay their taxes and the market tends to dip then for that reason (although the dip can be temporary). So in figuring out when to sell, watch resistance and watch the calendar.


Daryl Montgomery
Organizer,New York Investing meetup

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.

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