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Analyzing a Possible Recovery

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The Fed’s announcement about buying as much as $1.2 trillion worth of Treasury and government agency dept (such as Fannie Mae and Freddie Mac) caused an initial ripple affect across various asset classes. The dollar dropped while the price of gold (GLD), silver (SLV) and 30-year Treasury bonds (TLT) spiked.

Early in 2009, ETFguide informed subscribers that the stock market would bottom between Dow 6,000 and Dow 6,700. This bottom was to be followed by a multi-month rally. Even though the rally had already started when the Fed announced its plan, credit for future gains will likely be attributed, at least partially, to Bernanke’s “foresight.”

The four most reliable fundamental indicators, however, point to a change of events once this rally tires.

An examination of historic patterns tells us that the stock market does not bottom unless dividend yields, P/E ratios and investor sentiment (represented by mutual fund cash holdings) reach a rock-bottom level. This level is still far away.

In fact, the Dow Jones measured in the only true currency – gold – shows how steep the decline will be. (The March issue of the ETF Profit Strategy Newsletter includes a full analysis of the above four indicators along with detailed target levels and corresponding strategies.)