Beware of false profits

Beware of False “Profits”

The Dow Jones Industrial Average surged more than 5% today rallying to 6,926, up nearly 380 points after Citigroup reported that it had “operated” at a profit for the first two months of the year. What is even more disturbing is that many noteworthy stock market experts have been coming on the stock market channels this afternoon claiming that we have made a bottom in the stock market.

At the end of February, I had been anticipating that the stock market could bottom. I had been looking for support on the Dow average at the 7,500 level along with support for a large number of stocks that I watch in every industry. But the Dow broke through this important level of support and the majority of stocks followed. While “doom and gloom” continues to be pervasive on Wall Street and in the minds of most investors, this positive comment sparked a surge in the market.

But what does it mean???? Do you really believe what bank executives say? I can cite dozens of examples where corporate executives and government officials as well have reported to us that all is well. But then a month later, company stock prices and even economies collapse. It’s clearly evident that CEOs of major corporations and key US government officials don’t really have a clue….

And what does this mean? They are “operating” profitably. I don’t think that the problem is that we have too many unproductive employees making salaries that exceed corporate revenues. There is no doubt that these corporations can function profitably. It is the massive writedowns and inability to price toxic assets that have been driving the financials down.

DON’T GET SUCKED IN

Bear market rallies are short and swift. Look at the weekly chart above. The Dow has only rallied to a trendline that is declining substantially. Don’t react to massive market moves emotionally. Here at the Trendsetter, we analyze our data and look for a number of factors to consider before making investment decisions. One important factor is Volatility. As mentioned before, when the volatility levels continue to expand, you must stay with the trend.

On a monthly basis, Size or my indicator of volatility, continues to gain strength despite today’s rally. For long term investors, be careful about entering markets that still have increasing downsize momentum.

In addition to watching this indicator, I like to see a test of the low. When we see such a test, especially with monthly data, we have some confidence that we have seen a bottom. I never trust a bottom that has not been tested. If we rally hard from existing stock market levels without having a three or four month test of the lows, I will always be looking for “shorting” opportunities, opportunities to play a stock or index to go down.

In our last issue, I recommended Kohls and mentioned that a number of retail stocks appeared to be ready to accumulate. A key reason for making the recommendation was that Kohls in fact made a three month test of the lows.



As can be seen in this chart, Kohls appears to have bottomed and is now headed upwards. While it may meet resistance at trendlines above, my experience has shown that when a stock establishes such a base (or topping formation), the ensuing move will be substantial and sustainable.

After hearing so many market gurus claiming that the bottom of the market is in, I reviewed my stock market data base, looking at monthly data. Perhaps IBM and one or two other stocks appear to be setting up to be buys in my end of the month newsletter. But as seen a month ago with I did a mid-month review, more than 100 stocks looked like potential buys but in the end, the market collapsed and I had very little to offer to recommend in the previous newsletter.

WHAT ARE WE WAITING FOR??

I heard it well put the other day what we are waiting for. I don’t believe that the problem with the stock market is valuation. There is no doubt that many companies are strong and are going to do well in the future, but the stock prices are not reflecting it. The problem is a lack of confidence in the capitalist system. We want to know, what happened? Who is responsible for this disaster. Will there be any accountability? Let’s face it, if heads don’t roll over this market meltdown, why would anyone ever again want to invest in the stock market?

It wasn’t that long ago that accounting fraud seemed to be a little pervasive in the US corporate world. Arther Anderson and other key accounting firms no longer exist because of funny accounting. I seem to remember that corporate CEOs and members of the Boards of Directors could be imprisoned if their financial reporting was wrong. But I haven’t heard anything about this now. Were the US laws and regulations so lax that no one can be held accountable for this? Then for sure, the regulators who were charged with ensuring that our financial and capitalist system remains viable should be prosecuted to the fullest extent. The grief that this financial meltdown has caused is so much more severe than any mass murderer has ever caused. The number of people affected by this terrible situations is much more harmful, in my opinion, than even 9/11. Millions and millions of people are now without jobs and families throughout the country, throughout the world, are suffering, while those who caused this problem are living their millionaire lifestyle, probably unaware or uncaring of the harm they have caused to the world’s societies.

If these people can go unpunished and no one held accountable for the problems that we are facing now, how can anyone ever have confidence in this system ever again? While my job is to provide financial planning and give investment ideas, how can I ever explain fraud, corruption or other evils that wipe out our savings and destroy our future? I can’t.

One thing that I know for sure, the market will do everything it can to take your money. Please be careful and don’t get sucked in to these bear market rallies.