Up? Down? Anyone's Guess . . .

Which Way Is The Stock Market Headed?

May 27, 2007
By: Jerry Cole - Retirement, Investment

Is the recent stock market rally over or just taking a breather?

If anyone was sure of the answer they wouldn't be reading (or writing) this column. It does look like we will have a down week though. This may be due to more than the average share of confusion lately.

Take for example home sales. On Thursday new-home sales for April reported an unexpected surge marking the biggest climb in 14 years, according to Commerce Department Data. However, the average price of a home last month decreased to $299, 100, from $324,700 in March. The median price was $229,100, lower than $257,600 in March. Then today existing-home sales for April came in at the lowest pace in nearly four years. The median price was $220,900, down 0.8% from a year ago but up slightly from March.

Lending standards have been tightened by the institutions, especially in the subprime area. The mortgage market has been a good profit center for the Street (Wall Street investment houses). But the appetite for products tied to risky or subprime mortgages has waned. Investors who are buying these securities are demanding better terms, which cuts into firm profits.


It has also been reported that commodities trading, which has been booming, may also have peaked. So, while some senior executives at the investment firms are predicting healthy profits, they also indicate profits will likely be down from the last quarter.

Another indicator that recent market gains may have peaked for now is the amount of credit used to purchase stocks. Borrowing money from brokerage firms to buy stocks or other securities is called margin debt. It is leverage and can be very effective providing the securities borrowed against are rising in value. The reverse if the case of the underlying securities are losing value. Margin debt for individual investors hit a record $295.87 billion in February, according to NYSE Euronext data. The National Association of Securities Dealers, which regulates Securities Dealers, warned last month that many investors underestimate the risks of trading on margin.

Yet some believe the U.S, market is in the midst of another long period of gains. A decade long bull market is supposed to take place once in a generation. There was one in the 1920's, another in the 1950's and one in the 1990's. Most bull markets run about three or four years. Therefore the current one should be coming to an end by usual standards. But just seven years after the bull market of the 1990's, some believe we are in another long term period of gains. This group of people who see the glass half full believe that the global economic strength we have experienced will keep things moving in an upward direction.

Some in the bull camp credit the Federal Reserve's policy on interest rates for sustaining the current rally. Indeed the Fed has been able to slow growth to a manageable pace without putting us into recession. Others credit resurgence of the laggards of the 1990's such as energy and commodity companies. Another fact the bulls state is that the present rally is coming off the worst bear market for the Dow Jones Industrial Average since the 1970's and the worst for the S&P 500 since the Depression. During 200-2002 the Dow fell 38% and the S&P 500 plunged 49%. The NASDAQ composite fell 78%.

You have to have different views in order to have a market.

At any time, some are buying and some are selling.

What is best at this time?

(The opinions expressed are solely those of the author and not Gen worth Financial Securities Corporation.)