Today's Market
by Dr Invest

I've been waiting most of the day to hear what Economic Cycle Research Institute's Lakshman Achuthan has to say about the magnificent recovery of the market.

Lakshman predicted, in the fall of 2011, that all of his indicators presented that a recession was emminent. This created no small stir amongst the finanical news media and they demanded to know what indicators he was using. Pressing him, they asked when this was to take place. Lakshman predicted that around the second quarter a recession would begin that hasn't yet been experienced.

Now, here in the last part of Feburary, 2012, with the economy roaring forward over the past three months, the financial news media called upon Lakshman to return, expecting the resulting apology and admission that he was wrong in his economic outlook. After all, hadn't they been proven right!

THE ECRI PREDICTION

Here is the video response of Laksham: www.businesscycle.com  Many news media markets have been re-interpreting ECRI's prediction, but in this BLOOMBERG video response by Laksham, there is NO backing down. Listen! Economic growth is SLOWING! If you don't have your investment protected by a STOP-SELL, give your financial adviser specific instructions about how much you want to lose before selling. If you really don't care, ride out another 20% decline. If you do care about a 15%, 20%, or 30% loss, protect yourself and talk to your financial adviser now.

WHY A SUDDEN TURN IN THE STOCK MARKET?

Only a month ago, Bernanke was using terms like: "grim outlook for U.S. economy", "the FED will return to buying securities in the months ahead to buttress a weak recovery".  John Hussman defined the market at Hussman Funds as: "overvalued, overbought, overbullish, rising-yeilds syndrome, coupled with an EXHAUSTION SYNDROME that has historically been followed by declines on the order of -25% over the ensuing 6 month period. Our return/risks estimates are HARD NEGATIVE here. www.hussmanfunds.com/wmc/wmc120213.htm

Laksham has become the laughing stock of the economic community, ridculed for his prediction eventhough every previous prediction has been right on target. Could he be wrong? Possibly, but then he could be right.

Business Insider presented this chart saying, "We've run this chart several times this year, and it still holds. It's a one-year look at the S&P 500 (red line) vs. the yield on the 10-year (blue line).

FRED

As you can see, the S&P and the 10-year yield moved closely up until about last December, when the stock  market started taking off, and the yield stayed low.

This is the result of the FED buying bonds, which is the equivilent of PRINTING MONEY. With all the liquidity in the market, stocks are climbing. This is completely in character with KEYNESIAN ECONOMICS, a view that government can control the economy with various economic policies and methods. For this reason, the STOCK MARKET IS NOT BEHAVING IN CHARACTER to the way it has always behaved. What seems to be up is down, and what is down is up.

Let me conclude with John Hussman's assessment: As of last week, the Market Climate for stocks remained unfavorable, reflecting overvalued, overbought, overbullish conditions, rising yield pressures, an exhaustion syndrome, and reduced but continuing economic concerns. Strategic Growth and Strategic International remain well-hedged here. Strategic Total Return continues to carry a duration of about 4.5 years in Treasuries, with only a few percent of assets in precious metals, utilities, and foreign currencies. We would view a significant change in the investment opportunity set as a very welcome development, but we remain unwilling to accept significant risk for insignificant or negative prospective return simply because of the temporary absence of better opportunities. If history is any guide, then one thing is certain - more durable investment opportunities will come. When they do, their arrival is typically announced by the abrupt destruction of preceding speculative gains.

Let me interpret. The risk is too great for the investment opportunities out there. Where there is an ABRUPT fall in the market, the temporary speculative gains you did get will be erased. Then, with the fall of the stock market, more durable opportunities to invest will come.

Please refer to this graph and the graph above it. As mentioned, the FED's purchase of bonds is a way of increasing liquidity in the market. (PRINTING MONEY) Both graphs show this occurring at the same POINT IN TIME. That should tell you something important. The above graph is for 12 month period, but by looking at a five-year chart or ten-year chart the past three month climb appears steeper and even more dramatic.

Be Prepared

Be prepared is an old boy scout moto, but at this time the adage would be well advised. Tell your broker to put a STOP-SELL on your investments. If you manage your own investments, put a STOP-SELL to protect your gains. Bernake may well print his way out of the looming recession, but it appears that even he is doubtful. Only you can keep your investment from declining.

(note: The above information is for entertainment purposes only and not to be used in anyway as financial advice.)