Stock Market for Beginners

After the Dow first hit 14,000 a few days ago and Bear Stearns announced that their two sub-prime hedge funds are basically worthless, we were set up perfect this morning to open down and trade much lower. Intel (INTC) traded down the other day after good earnings and forecast was another sign that we were at a temporary top. Both Google (GOOG) and Caterpillar (CAT) had sub par earnings, which weighed down on the market today. In general though, this bull market has fought off any significant bearish movement. Let’s examine why:

1. A lot of earnings are still due to come out and they are expected to be good. Any company that is related to commodities and the global economy is on fire. The declining dollar has also helped multinational earnings.
2. There are a ton of shorts out that ironically support the market. Having a lot of shorts out there is like having a ton of cash on the sideline ready to buy any dip and buy any rally.
3. The subprime issue is slowly getting priced into the market. Bear Stearns ended unch on the day after delivering news that might make them liable for an unknown amount of debt and unpredictable amount of lawsuits. Also Wells Fargo and Washington Mutual expressed very little subprime exposure.
4. Global stock market rally is pulling us up. Even though we are the largest economy in the world, our stock market is taking a back seat to what happens in the rest of the world. We are no longer the lead horse pulling the wagon.
5. We are in the third year of a presidential cycle which has shown to be statically strong.
6. We are in the parabolic phase of the China and Commodity bubble. During this phase, the bubble will expand to irrational levels with many money managers, analysts and retail investors getting sucked in. As traders, ask yourself how much energy, material, industrial and international stock you own or trade. When you wake up one morning and your whole portfolio is made up of these types of investments, you should start to worry about a top.

Share This