Since the market bottomed in March and started back up, investors have split into two groups. While some believe recent market gains are nothing more than a short bear market rally, others think it’s the start of something bigger. It seems that the battle to determine whether or not this is simply a bear market rally is being waged right around the 8500 level in the Dow, where we are currently.
While some investors focus more on recent activity – the past five years or less – others look at longer-term charts to determine trends. These two methods show two different pictures of the market, and this is likely causing much of the divide.
A five-year chart of the Dow paints a bleak picture: a massive rally ending mid-2007, a double-top followed by a massive decline, finishing with a small rally. It’s certainly understandable while many in the market see this as a head-fake before the market heads lower.
The 10-year chart tells a different story. It shows a Dow that has traded sideways for a decade, give or take fluctuations. To many investors, such a chart is a screaming buy signal. Many will remember the 1970s when the Dow traded sideways, more or less, for approximately a decade before going on an explosive run to new market highs. It has happened other times, and could easily happen again.
While we personally believe that this is the start of something bigger, it wouldn’t surprise us to see some profit-taking around currently levels, causing a correction in the Dow. This doesn’t mean that the market will fall to new lows, and more importantly it doesn’t mean that every sector will see losses.
We have argued in previous articles and still firmly believe that there are particular sectors in the market that are poised to do extremely well in the near future, regardless of the overall direction of the market. We especially like commodities because of their recent demand worldwide.
We believe that many people underestimate China and India. Both of these countries are progressing significantly in their economic development and have burgeoning middle classes. These new middle classes are going to demand goods and services that were previously considered unattainable luxuries.
For this reason both countries, China especially, are still buying resources in massive quantities. In fact, in the past few days, China has announced that it is looking to acquire more oil companies. All of this buying by China, India and others has been done to position them for after the global economy begins to recover, when they can improve the quality of life for their massive populations.
To investors all this means one thing: inflation. With India and China controlling larger proportions of the world’s resources, expect to see a weaker dollar in the near future, as well as the higher prices that come with it. If possible, position yourself to take advantage of the weakening dollar by investing in commodities, companies that produce them or investments in foreign countries whose currencies are likely to benefit.
The paradigm is changing and the investment world is being turned on its head. Astute investors can no longer limit their options to large U.S. stocks. In this new global market investors must search the world over for the best investments available. If this seems too daunting a task, please speak with a financial professional who can help you with your search.