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Starting
in late 2007 and through 2008 a historic, worldwide market crash brought some
of the largest corporations in the world to their knees. Between bankruptcies
and bailouts, many massive financial institutions have been struggling simply
to keep alive. Trillion dollar currency markets have been thrashing up and
down like penny stocks. The largest housing bubble in history has popped with
governments intervening and thereby prolonging the effects. Worldwide
trillions of dollars in market equity has been lost.
Obviously
gigantic problems such as the ones described above do not occur over night. These
massive market distortions build up over many years and in some cases
decades.
So the
critical questions we ask ourselves are:
1. Is it
realistic to think that the effects of these types of devastating events will
be resolved in a matter of months? We don't think so.
2. Knowing
that markets do not move up or down in a straight line, does it seem logical
that the markets are now off to a new long term bull market; or could they be
experiencing a temporary bounce? We think that history would suggest a
bounce.
3. Given the
huge amount of volatility in the market, does it make sense that in the short
term many good indicators such as seasonal trends could be less reliable? We
think so.
We
believe commodities are in a long term bull market and therefore we look for
lower risk opportunities to add to our positions. Based on seasonal trends we
have typically added to our precious metal positions in the summer and fall
months as we did last November. We have heard many analysts suggesting that
seasonal trends are once again in the investors favor, but given the
circumstances, we are proceeding with caution.
Because
of the historic drop in all markets we predicted that this summer's seasonal
trends would be different than most years and instead of a falling market we
would see a rising market. The following chart illustrates the monthly
percentage gains of the Dow Jones Industrial Average compared to an average
of the monthly percentage gains over the last eight years.
As you
can see in the chart above, which is based on the past four years of data
averaged together, the typical weak summer months of July and August were
very strong in 2009. This year the seasonal trends are different, showing a
mega bounce which followed a mega drop. In other words the pure power of the
markets momentum trumped the power of the typical seasonal trends. Our next
chart illustrates how big that mega bounce has been since February of this year.
Based on
the last eight years of monthly Dow Jones Industrial Average data averaged
together, the above chart helps illustrate just how big the market bounce has
been since February. Similar to a rubber band being stretched, when the
market fell hard and fast over 2008, it was inevitable that a snapback rally,
like the one we are seeing today, would follow. It is this momentum driven
bounce that we believe is taking the market higher rather than fundamental
influences such as seasonal trends. Once again we can visually see how the
markets momentum, in this situation, is much more important than seasonal
influences.
We are
not suggesting that prices within the Dow Jones and other markets cannot head
higher from the date of this article. In fact it would not surprise us if the
markets in general started a new drop now or if it continued to climb until
March 2010. However, it is our opinion that the fundamental problems within
the US and around the world are monumentally big and we believe the recent
worldwide market drops are evidence of that. We do not believe such massive
imbalances can be quickly resolved and we do not believe the typical seasonal
patterns are as reliable this year as they have been in the past. Anything
can happen in the markets and we cannot guarantee that the US markets are going to test or possibly break through their old lows in the not too
distant future. Unfortunately we do not have a crystal ball. However, we do
not think these markets are off to another long term bull market and we are
very skeptical that this potential bounce will last too much longer.
To learn
more please visit us at www.investmentscore.com. Here you can sign
up for our free newsletter, read more free articles such as this one and
learn more about our strategies. Finally, if you enjoyed this article we ask
that you forward it on to those you think would benefit from it. Good luck out there.
Michael Kilbach
Editor
Investmentscore.com
Michel Kilbach is the President
and Editor or www.investmentscore.com,
an online publication designed to show investors how to make profitable entry
and exit trading decisions in high growth potential investments.
Investmentscore uses a unique scoring system as a visual guide to assist
investors in making lower risk / higher reward trades.
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© 2006-2007 Michael Kilbach
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