Thursday, January 7, 2010

It’s a Brand New Day

Let’s start off with some advice from that great economist Sting:

Turn the clock to zero, honey
I’ll sell the stock, we’ll spend all the money
We’re starting up a brand new day (or year, or decade, for that matter)

Actually not bad advice if you expect the stock market to tank and inflation to rise.

What will happen to the stock market in 2010? Seldom has there been such a wide divergence of opinion as we begin a new year. You can be certain the market will go up, unless of course it goes down, or maybe it will just “move sideways” (I love that expression). Let’s look at some predictions:

The Stock Market Will Go Up

The market is up over 60% from its low last March. It has momentum and will continue to rise as the economy continues to grow. There are many respected analysts predicting stocks will increase 10-20% in 2010. One of the most optimistic is the team of Brian Wesbury and Bob Stein ( They are predicting a 24% increase in stocks this year and were very accurate in forecasting the 2009 jump.

The Stock Market Will Go Down

The stock market is very “over-bought” and prices are much too high. The fundamentals are bad. Sales volumes have been too low. The economy will slump once the fiscal and monetary boost provided by Treasury and the Fed fades, taking the stock market down with it. There are many respected analysts predicting a drop of more than 15% in 2010. One of the most pessimistic is David Tice (Federated Investors) who predicts a 40% decrease in 2010.

The Stock Market Will Go Down ----- Then Back Up

Stock market prices are too high after the 2009 rally. The market will dip (10-15%) in the first half of the year. Later, continued economic growth will boost the stock market and it will finish the year with a gain of 10-15%. This scenario is favored by Shaeffers Research and Dennis Keade.

What the Model “T” Says

The Model “T” is still forecasting an S&P bottom of 580. This would be a 48% drop from 2009 year-end and significantly lower than most of the pessimistic forecasts. It is apparent now that the commercial transportation industry (which is very connected to the housing industry) declined much more than most industries during this recession. Because the Model “T” is based on the transportation market, it is probably reading too low at this point.

There is also a timing factor to the Model “T”. Current graphs of stock price trends would indicate a long-term rally has begun. So is this a real recovery or just an artificial upward bending of the curve causing by the extraordinary actions taken by the Treasury and the FED to stabilize and prop up the economy? At this point, no one knows.

The Model “T” however indicates the recovery is premature. It says the real recovery should begin in Q4, 2010. This would mean a significant drop in the market for the first nine months of the year, with a recovery beginning in Q4.

What I Think

Using the most optimistic and pessimistic predictions from the experts, I can confidently forecast the S&P 500 index will end the year between 670 and 1390. Amusing, no doubt, but I did this to make a point. With this much uncertainty, now is not the time to make any bold moves. It is probably wise at this point to reduce your risk since it is likely that there will be some pull back on stocks in the first half of the year.

Because the recent rally was largely fueled by optimism, it will be interesting to see what happens if the optimism fades. If this were a movie, it would be fun to watch. Unfortunately it is more like reality television and everyone with stock investments is a participant in this show.

Turn the clock to zero, boss
The river’s wide, we’ll swim across
Starting up a brand new day

Disclaimer Statement

The information contained in this blog is for strictly discussion and reference purposes only. In no way and under no circumstances should the information presented here be intended as investment advice. Statements made on this blog do not represent a recommendation on buying or selling equities or securities nor which ones to trade. Please make your own responsible investment decisions based on your own research.

The information in this blog is solely the opinion of the writer (except for comments made by people to the posts or references in the posts attributed to other people).

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