Much fanfare and hope surrounded the approval of the first bailout, unleashed on October 2, 2008. As the stock market dropped 30 percent within the next 45 days, it became obvious that this bailout did not have the effect hoped for.
Less than two months after the first bailout, a second stimulus package that is even grander in scope has been unveiled. According to Democratic supporters, this bill will create millions of jobs and go a far way in repairing a broken economy. Republican opponents believe this bill we do nothing more than mortgage the future of our children. While there will always be opposing viewpoints, the proof is in the pudding. How will the stock market react?
One similarity between today and a few months ago is that the financial sector has already dropped to new lows. The Financial Select Sector SPDR (XLF) took out their November 21, 2008, lows at the end of January 2009. The Dow Jones Transportation average (IYT) also fell two new lows while the Dow Jones Industrial Average remains above. According to the Dow Theory, this is a non-confirmation with bearish implications.
The short-term implications of the recent market action may drive the stock market to a new 10-year low. However, investing is not just about the here-and now. Investing is about successfully discerning the long-term trend. What is the long-term trend?
Just as a craftsman carefully selects the right tool for the job, investors need to take a look at the right indicators to safeguard their portfolios. Such long-term indicators with a track-record of accuracy included dividend yields, P/E ratios, investor’s sentiment and the Dow Jones measured in real currency, gold.
The Dow Jones, as measured in gold, topped in the year 2000 and has fallen nearly 75 percent since. This measure is far more accurate than the Dow Jones measured in inflated U.S. dollars. If history is the right guide, the Dow in dollars will eventually catch up with the Dow in gold.
A look at major market bottoms in the past shows that the dividend yield and P/E ratio have a long way to go before levels equal to historic market bottoms are reached.
For more, see the March issue of the ETF Profit Strategy Newsletter, which includes a detailed analysis of the above-mentioned indicators along with a forward looking forecast. Indicative of the implications, we have named these indicators the “Four Horsemen.”