This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.

Monday, August 24, 2009

Market fizzle likely on lackluster data

For last three or four weeks, the stock market has been trading sideways, more or less, on economic news that has seen no substantial improvement. While obviously this has put many investors’ minds at ease, we may not be out of the woods just yet.

First off, at this point there are no economic fundamentals supporting this market. The numbers show no substantial improvement, and certainly not enough to warrant the kind of market recovery we’ve seen so far. At some point, the numbers we’re seeing on the economy need to improve, or else the market will turn, but for the worse.

This is especially true with unemployment. With the consumer-dominated economy of the US, there is really no possibility of any substantial recovery with unemployment so high. Americans simply don’t have the money to spend in order to turn this economy around.

Meanwhile, so far the new Administration and the Federal Reserve have released only a small fraction of the funds authorized through the stimulus bills. The government is also dragging its feet when it comes to paying back rebates auto dealers have accrued through Cash for Clunkers.

These issues make little since. Why did the government push through stimulus bills that were so unpopular, just to sit on the money? Why are they holding back money owed to car dealers, rather than making good on their promise and allowing that money to make its way through the economy? Finally, why does this White House seem to care so little about turning the economy around?

But, since economic numbers don’t show any signs of improving, a correction in stocks seems imminent. The question is how big it will be. While it certainly could put the Dow back around its previous lows, the chances seem higher than it could simply catch its breath after retreating to the 7500-8000 level.

To give some historical perspective, consider the recovery after the 1929 crash. After finally bottoming in July of 1932, the stock market rallied for just two months before topping out in early September. It then traded sideways for more than six months before it finally broke out in May of ’33.

Market action from the mid-1970s tells a similar story. After putting in a second and final bottom in December of 1974, stocks rallied for seven months, then went into a holding pattern through the end of the year.

As it stands, we’ve been rallying since March, and the market appears to be losing steam. In fact, it’s overbought according to multiple indicators. Not only that, but we are now nearing September and October, which historically tend to be the weakest months for stocks.

With all this in mind, chances are better than average that the market won’t move substantial higher in the next several months. And while an end of the year rally isn’t out of the question, I certainly wouldn’t hold my breath. Especially not after seeing the Dow Jones Industrials rally more than 40% off its bottom and tracing nearly 40% of its decline since October of 2007.

The real question for investors is whether they have a plan that will stand up to either a violent correction or a market fizzle. And while many Americans put that responsibility off on their broker, it’s important to understand that the financial industry is one of several that are still suffering, and it may have a largest impact on investment portfolios.

While the auto industry has suffered lately due to lower demand, increasing inventory, unemployment, and the like, and the slowdown in real estate over the past year or two has caused the cash flow for many to dry up, the turmoil in the financial industry impacts many Americans even more significantly.

Since last year, major brokerage houses have obviously taken a huge hit, and after a wave of failure and mergers, there has been a massive consolidation in the industry. This has left brokers worrying about their own jobs, and spending less time focusing on client portfolios. For this reason, as outlined in a Wall Street Journal article last week (Wall Street’s B-List Firms Trade on Bigger Rival’s Woes, August 11, 2009), smaller firms are growing to fill the void being left as the formerly-dominant firms struggle.

Americans need to understand that there is major shift occurring in this country, one very different from the changes we saw occurring for decades leading up to the collapse last year. We’re seeing it in politics, manufacturing and consuming; and the financial industry is no different.

Americans used to commit considerable time to researching their own investments, before they started delegating that responsibility to advisors. Of course, initially they wanted to get to know their advisor and understand the person’s strategy for managing money, as well as their personal character. Unfortunately, now we are seeing fewer and fewer people taking the time to do their due diligence and get to know what they are buying and who is selling it to them.

The bottom line is this: Investors need to know who they are entrusting with their life savings. If they can’t take the time to do their homework, they shouldn’t be surprised when they find they’ve been caught up in the next big swindle.

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