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.

Thursday, February 11, 2010

Market to Consolidate While Economy Catches Up

With the market having pulled back since leveling off and topping out in January, we believe that was is now developing is the beginning of a trading range. Last month when the market made a top, after coming off the March bottom, it did so approximately halfway between the 2002 market bottom and the all-time high in 2007, which is technically significant.

Many readers will recall that we have been saying since the market started down two years ago that we expected, once the rebound passed, the market would enter a long-term consolidation pattern, where it was expected to say for as long as a few years.

Unlike some ‘doom-and-gloom’ preachers, we remain optimistic with respect to both the global economy and the financial markets. What we see developing in the market will certainly allow for profits, but certainly not for investors employing a buy-and-hold strategy for their portfolios.

Fortunately, we believe most investors have learned the valuable lesson that buy-and-hold doesn’t work, particularly after seeing no gains in stocks over the last decade. For those poor souls who have not yet adapted to the new investment landscape, their fruitless decade may last longer still.

While the market appears poised for a long-term consolidation, we continue to see improvement forthcoming for the economy. However, as financial markets tend to lead the economy, much of the coming improvement has already been anticipated, and is already priced into the market.

The US economy, after such a dismal couple of years, is particularly poised for improvement. Case in point is the US auto industry, which has lately been hiring back workers to fill renewed demand after inventory reductions.

Over the course of this recession the rate of auto production had slowed so substantially that it actually fell below the historical scrap rate, a condition that is absolutely unsustainable. Now that production is revving up again, the recovery in the auto sector will be especially noticeable in the US economy.

As markets so often do, the global financial markets seem to be expecting a relative strengthening of the US economy internationally, as evidenced by the recent rally in the US Dollar in foreign exchange markets.

Though many investors have voiced concern that the dollar might become worthless, we do not see this as a real threat. We believe most who make this argument are less experienced investors who, for the most part, lack knowledge for real-world economics.

In conjunction with the dollar’s recent rally, commodities prices have taken a tumble, as of late. This is due in part to recent revelations regarding China’s recent trading in commodities.

While it had long been assumed that China had been consuming the resources it was purchasing in order to fulfill increased demand, it now appears that China has been stockpiling resources in preparation for a recovery, though much remains available for consumption.

Thanks to the realization that these resources have yet to be consumed, prices of many commodities are set to correct and the dollar likely to continue its recent rally.

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