Making Money Alert
Caution, Caution, Caution
10/12/2006
The big news in the market over the past week has been the many new all-time highs set by the Dow Jones Industrial Average. The media and mainstream Wall Street have embraced this event as if the Nasdaq and every other stock had gone to new highs, as well. And, while the tech-heavy index isn't anywhere close to an all-time high, the bulls out there are hoping you won't notice. It seems like nearly every analysis paraded in front of the cameras these days is bullish on the prospects for the markets to move higher between now and year's end.
I offer a different point of view. I think that this price point in equities represents a very high-risk entry position for those putting money to work right now. Consider that since the secular bear market began in 2000, the stock market has behaved quite differently from the roaring bull market period of the 1980s and 1990s. But what is amazing to me is that investors and advisors are following the same behavioral patterns they did during that vaunted time period. Well, they do so at their own peril.
This market is full of divergences right now. The most obvious is the disconnect between the stock market and the bond market. Stock prices are anticipating that a soft landing is the highest probable outcome given the current economic evidence. A soft landing would be slowing economic growth with lower inflation and without a recession. The bond market, with its inverted yield curve, is telling us that economic activity is going to slow to zero, and that the Federal Reserve's next move will be to cut interest rates to spur economic growth.
The bond market is almost three times larger than the stock market. Maybe bond traders have it wrong, and maybe stocks will power ahead with the hopes of another leg in the cyclical bull run. The action of stocks and bonds in the forth quarter will set the stage on how much risk and reward there will be to your money in 2007.
My conclusion right now is that entering this market with a large portion of your investment money places your capital at undue risk of a short-term loss. I believe you should wait until the excesses of this recent upward move are worked off. I say keep your powder dry and your patience in check, and wait for better opportunities ahead.
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STOCKCHARTS.COM CHARTS OF THE WEEK
"Don't hang on, nothing lasts forever but the earth and sky."
—Kansas, "Dust In The Wind"
Stockcharts.com definitely has become one of my favorite online destinations. Why? Well, Stockcharts.com has outstanding charting tools just about any computer-literate person can learn to use in minutes. The service also is free -- which is always a good thing.
I urge all of my Alert readers even remotely interested in charting their investments to check out stockcharts.com. You simply cannot beat their range of available information. From moving averages to technical analysis tools, these guys have got it all.
I'd even go so far as to say that if you own any equity investments, you should run a chart on each of your positions using stockcharts.com. After all, what's more important than keeping tabs on your money? I can think of few other things that rank higher.
Now let's take a look at three charts of the market that I pulled from stockcharts.com just a short time ago.
The first is a chart of the Dow Jones Industrial Average. As you can see, the chart clearly indicates a sharp and steady rise since the July lows. In fact, as far as stock prices go, this is as close to straight up as you are going to get. A pretty picture for sure, but as the song says, nothing lasts forever but the earth and sky.
Whenever I see a chart like this I start worrying. What goes up must come down, and a big move higher like this in the Dow is certainly not sustainable. That's one of the chief reasons why I am advising so much caution if you are considering entering this market.
Now let's check out a chart of the broader-based S&P 500 Index. This chart also shows a virtually straight-up rise in the price of the index. Again, straight-up in stocks does not bode well for those of you considering an entry point. Let things cool off first, then you'll be in a much better position to profit.
Finally, let's take a look at international stocks as represented by the iShares MSCI EAFE (EFA). This exchange-traded fund (ETF) seeks investment results that correspond to the price and yield performance of the EAFE index, and it includes the best stocks from Europe, Australia and the Far East. It's also a great proxy for the entire international market.
Here we see a run-up from the July lows; however, the run-up is showing signs of stalling. There are two reasons for this situation. One is the rising value of the U.S. dollar, which tends to make international stocks less attractive. The other reason is likely just a lack of momentum going forward for this already-extended index.
The way EFA's chart looks could be the way the Dow and S&P 500 charts will look like in the weeks and months ahead -- and possibly much worse. Again, there is a lot of risk revealed in all these charts, and identifying that risk is one of the tasks made easy with stockcharts.com.
DOUG GOES YOUTUBE
The technological advances just never cease! You now can catch a video stream of my live market updates, just click here. This outreach effort is just another way for us to interact with you. Sign up at the web site to comment on my videos, send me a message, and get updates when we post new episodes. I broadcast a market update Monday through Saturday, which is uploaded by 5 pm PST. And, if you want to check out past shows, go to our video archive. Don't forget, you also can listen to the show through our podcast and live streaming whenever it's convenient for you. It's all at the site. It is just another way that we are helping you to stay on top of your money.COMPUTING FOR LIFE
"Computing is not about computers any more. It is about living."
—Nicolas Negroponte, futurist and MIT computer scientist
This week search engine firm Google bought YouTube for $1.65 billion in stock. Yes, that's billion with a "B." That's a lot of money for a privately held company that hasn't even turned a profit yet. But Google's acquisition isn't about profits right now. It's about the future, and as Negroponte points out in the above quote, computing isn't about computers anymore.
I know one thing, based upon the positive response I've had from my YouTube experience, online video is definitely a winner. The future is here my friends, and failure to embrace a changing world will only come at your own peril.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you'd like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars, or anything else.