Stock Market Notes

Wall Street is showing every sign that the recent bull run is now over. Now the question is where will the buying come in and a new trading floor begin?

THE DOW IS STILL HOLDING ABOVE 10,000 AND THIS HELPS INVESTOR PSYCHOLOGY

UPDATE FRIDAY, SEPTEMBER 3, 2010

This past week was a good week for the markets and one reason might be that stocks tend to rally during the first three trading days of the month. Remember, stocks tend to rally during the first five days of the month because this is when new money traditionally enters the market through contributions to pension and investment plans. It also helps that the Dow held above the critical 10,000 psychological support level again despite some sharp selling in recent days. That could have boosted investor confidence and allowed for the start of the month stock buying. But the big question is what happens when the five day start of the month buying period is over? Will this September deliver another September slaughter for stocks? Traditionally September is the worst month of the year to own stocks.

And don't forget that. September is traditionally the worst month of the year for owning stocks and over the years we have had many September Slaughters. And October is infamous for its October Massacres including the big crashes. And with the recent selling and the dip below 10K about a week ago, this is a time for caution. But it is not the time to pull out of the market entirely.

But we have to be cautious as the Dow is only about 450 points from dipping under 10K again.

We usually look for a summer rally, but that didn't happen because there is too much talk now about a double dip recession, and there is frustration about high unemployment and now there are concerns about China slowing its economy and the impact that might have on world demand for products from the USA. The market finished the week with the Dow above 10,400. With the Dow above 10K the market is out of the danger zone, but still not out of the woods. And I am very concerned about what might happen during the balance of September and October.

We now know that the Dow met severe resistance at the 11,200 level and with the Dow now down about 800 points from the recent high, and with the Dow around 10,400 we should consider the risk of even more selling ahead. The question now is when will the buyers come in, and where will the new support level for the market be created?

It was certainly looking like a new bull market until a couple of weeks ago. Perhaps it was a new bull market -- but that bull was corraled by selling over worries about the Euro and the economics of many countries in Europe. Even with the selloff, we could say the new bull market started a year ago when the Dow and many stocks hit their low on March 9, 2009. Over the past seven weeks, the rally stopped and the selling hit the market hard.

For the full year 2009 the Dow was up about 20%, the S&P 500 was up about 25% and the NASDAQ was up about 45%. If Wall Street is a true "leading indicator" then it is telling us that the recession is ending if not already over. Can this rally resume? Well, right now it looks like we have had a correction in what may be a new bull market. We'll know for sure very soon if the selling stops and new buyers come in.

But the recent drop back to below 10,000 has changed all the optimism we used to have. There will be more worry that any new rally will not be sustained in the days and weeks ahead.

Frankly, my opinion on investing in the stock market has not changed for several weeks now. I still urge caution. However, the trend has been for a rising stock market. I'm not suggesting that you throw in the towel just yet. Just be especially cautious now that September and October are here.

However, I don't know what the future will hold. We will have to see how this all plays out over the next few weeks. All I can suggest is this: after the recent bloodbath, would you really want to commit new money into the stock market now? Not me. I'm the kind of investor who wants to buy high and sell even higher-- and that's a piece of advice from stock market guru Stan Weinstein that I've followed for more than a quarter century, ever since I met him in Florida in the early 1980s. I don't want to bottom fish because I don't know when the bottom will fall out and a new lower bottom will form. However, with that said, perhaps it is time to return to limited stock market buying.

Every rally we have now could be a sucker rally or a fake-out rally. That is why limited, paced buying might be the way to go now.

For months I have been urging caution even as certain financial reporters including local radio business reporters and the anchors on CNBC are asking stockbrokers and investment advisers about where investors should put their stock market money now?

If you have extra money, it should be going into insured bank accounts where there is no risk of loss. Bank accounts are "golden" now because inflation is low and the small interest paid by banks will not be whittled down by rising prices. It's that simple-- put the money, or keep the money in the bank. But if you have a regular, long term stock market investment plan, you might want to start or keep making regular, long term investments in it. This is the most bullish I've been in more than a year but again, I urge caution.

SATURDAY, AUGUST 28 UPDATE: WHAT ABOUT INFLATION AS THE ECONOMY RECOVERS?

There was more talk this past week about a double dip recession, and encouraging words from the Fed that interest rates will remain low to keep the economy improving. About six months ago I raised the prospect for higher inflation as the economy improves, but the economy is just not improving fast enough to trigger inflation now. But there is concern that government deficits will ultimately raise inflation and interest rates -- but I just can't see that happening now, or in the next six months, or even in the next year.

Fed Chairman Ben Bernanke and other Federal Reserve Officials have indicated that interest rates will stay low because the economy is still fragile and they don't want to risk a "double dip" recession. Interest rates aren't going up just yet, but we are cautioned to remember that they may have to rise in the future.

Many economists are talking about the possible need for the Federal Reserve to raise interest rates in the future as the economy improves and works its way out of recession and a rise in interest rates to help boost the value of the dollar on world money markets. While we don't want interest rates to go up, the fact that they are talking about higher interest rates and an end to the recession are both welcomed.

Are we headed for big inflation because of all the government spending to end the recession and boost the economy? That is the danger we face ahead -- not around the corner, but perhaps in a year or two.

No one can be sure when this recession will end or if we might have slumpflation which is a return of simultaneous inflation and recession. Slumpflation is a rare event, and the last time we had slumpflation it lasted a short time. The latest comments from our Federal Reserve indicate that inflation is not a problem, but recession is. Still there are concerns about inflation.

You are probably more familiar with the term stagflation which happens when there is inflation in a stagnant economy. Stagflation is a more common event in an economy, but not slumpflation which is rare. There are widespread fears among some investors about slumpflation because the governments of the world are pouring billions of dollars into economies at the same time that their economies are in a recession. The fear is that the new money will raise prices at the same time that recession is taking its toll. However, there are also comments that the "money supply" is under control and that would indicate inflation will be under control.

There is a lot of criticism about "the bailout." But I am aftraid one fact is being overlooked: the failure for the banks was caused by you and your neighbors who bought more house than they could afford and lied about their ability to repay the mortgage loans. Frankly, this bailout of taxpayer money is going to pay for other taxpayers who cheated the system. The banks didn't commit mortgage fraud-- the consumers did.

Thanks for watching and good shopping and investing, Alan Mendelson

Here on our new media website "Moneyman" Alan Mendelson who is the original Best Deals TV show reporter and consumer advocate shows you the best deals on TV, and the best buys, bargains and where savvy shoppers go to save, and how to get the most for "your money" with the best of Los Angeles, Orange County, Ventura County, Riverside County and San Bernardino County. Our Best Buys TV Show is the only regularly scheduled weekly best deals TV show in Southern California. We show you the best deals on TV and more deals on www.alanbestbuys.com and www.vegasbestbuys.com and www.moredeals.com the original buy and sell, show and tell, video website.