Tremors Before the Fall

By on April 28, 2010

The market has been on an almost uninterrupted rise since early March 2009, more than a year ago. Stocks such as Wyndam Worldwide (WYN) and Brunswick (BC) have risen 10-fold from the bottom. However, the balance sheets of many companies were devastated during the recession and will take a long time to recover.

The economy has shown a lot of signs of stability, but there is still a chance of renewed economic weakness as housing doesn’t recover as some expect. Nobody is talking about the housing ATM anymore and it won’t come back to what it once was with banking officials being grilled by Congress. Government stimulus is the only thing that stabilized the economy and although it could continue at these levels, it probably won’t grow to bring down unemployment. Disappointing economic growth doesn’t seem to be a consideration by investors at the moment.

The popular averages have been creeping up, but recent events have caused some wicked sell-offs such as the one yesterday (Dow -213 points). It would not surprise me to see a 30 percent correction (or plunge) below 9,000 on the Dow. Nobody expects it and sentiment has become overly bullish. Even Jeremy Grantham says a run to the old highs is possible. Therefore caution is probably warranted.
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