Stock Valuation: The Current Rally
Stocks have been rallying. Are we in a new bull market? It's always interesting to read and listen as the experts weigh in. If you listen carefully, you'll find very few who really present any kind of sound reasoning for their opinions.
A while back, on a day when the stock market shot up, the daily commentary pinpointed a memo from Citibank's CEO, Vikram Pandit, which was "leaked" to the press. Supposedly the good news that Citibank would show a profit for the first quarter gave the market a booster shot.
Let's think about this. Banks are still sitting with somewhere around $300 billion+ of toxic assets. Citi holds more than its fair share. Because of that Citi was given $45 billion by the U.S. government. Can you imagine not showing a profit after someone gives you $45 billion? So why did the market react like it was "surprised" by Citi's profits?
At the time, the stock market was severely "oversold." (That's what is known as a "technical" condition.) The stock market had just hit its lowest point in this bear market the week before, on March 9th. The Dow was more than 30% below its 200-day moving average. That's as good a definition of "oversold" as you're likely to find. Markets that are oversold rally.
(Remember that traders are always going about their business in the markets. They buy and sell in up and down markets. Some succeed in making money as the market has gone down. Some will make money when it goes up. The really great ones can make money up or down.)
So was the Citi memo irrelevant. It was in this sense. An oversold market needs an "excuse" to rally. The Citi memo may have provided the excuse.
None of this should concern us (unless you're a trader). The real question is whether the rally that's going on now is the beginning of a bull market or a powerful rally in an ongoing bear market.
We'll have more to say on this in the coming weeks. For now, we'll only point out that, in general, stock valuations are not at the levels they have historically been at the start of other great bull markets. Their valuations aren't as low as they should be. This doesn't mean you can't make money in a rally in a bear market. Just remember it's hard to do successfully, unless you're a great trader.
A good bit of advice it took me a while to learn is this: it's better to do nothing if you're not sure what's going on. Doing nothing means sitting on the sidelines and letting the action go on without you. Maybe you just sit in a money market for the time being until you feel you have a workable strategy.
In the last few weeks, I've made the first trades I've made in months. I'm just getting a feel for things after being pretty much out of stocks during the 2007-2008 collapse. (Now there was a strategy that worked pretty well!) I realize I can't just sit in a money market for the rest of my life. But I also didn't want to jump the gun and just "take action" when I couldn't see a good reason to do so. It's a matter of prudence and patience.
You need to develop that same sense of prudence and patience. If this turns out to be a rally in an ongoing bear market, you could get taken to the cleaners if you commit a substantial portion of your investment money to stocks right now.
A while back, on a day when the stock market shot up, the daily commentary pinpointed a memo from Citibank's CEO, Vikram Pandit, which was "leaked" to the press. Supposedly the good news that Citibank would show a profit for the first quarter gave the market a booster shot.
Let's think about this. Banks are still sitting with somewhere around $300 billion+ of toxic assets. Citi holds more than its fair share. Because of that Citi was given $45 billion by the U.S. government. Can you imagine not showing a profit after someone gives you $45 billion? So why did the market react like it was "surprised" by Citi's profits?
At the time, the stock market was severely "oversold." (That's what is known as a "technical" condition.) The stock market had just hit its lowest point in this bear market the week before, on March 9th. The Dow was more than 30% below its 200-day moving average. That's as good a definition of "oversold" as you're likely to find. Markets that are oversold rally.
(Remember that traders are always going about their business in the markets. They buy and sell in up and down markets. Some succeed in making money as the market has gone down. Some will make money when it goes up. The really great ones can make money up or down.)
So was the Citi memo irrelevant. It was in this sense. An oversold market needs an "excuse" to rally. The Citi memo may have provided the excuse.
None of this should concern us (unless you're a trader). The real question is whether the rally that's going on now is the beginning of a bull market or a powerful rally in an ongoing bear market.
We'll have more to say on this in the coming weeks. For now, we'll only point out that, in general, stock valuations are not at the levels they have historically been at the start of other great bull markets. Their valuations aren't as low as they should be. This doesn't mean you can't make money in a rally in a bear market. Just remember it's hard to do successfully, unless you're a great trader.
A good bit of advice it took me a while to learn is this: it's better to do nothing if you're not sure what's going on. Doing nothing means sitting on the sidelines and letting the action go on without you. Maybe you just sit in a money market for the time being until you feel you have a workable strategy.
In the last few weeks, I've made the first trades I've made in months. I'm just getting a feel for things after being pretty much out of stocks during the 2007-2008 collapse. (Now there was a strategy that worked pretty well!) I realize I can't just sit in a money market for the rest of my life. But I also didn't want to jump the gun and just "take action" when I couldn't see a good reason to do so. It's a matter of prudence and patience.
You need to develop that same sense of prudence and patience. If this turns out to be a rally in an ongoing bear market, you could get taken to the cleaners if you commit a substantial portion of your investment money to stocks right now.
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