Thursday, February 21, 2008

Will US stocks go higher?

What could take the stock market higher from here?

I think this is a question that's had a few investors thinking lately. I know that I've been wondering the same thing, especially after hearing some of my favorite investment minds mulling this question over in recent days.

You may be bullish on the market, bearish, or indifferent, but it's still a rather interesting puzzle to look over. So I'm sitting here wondering, where do we go from here?

Recently, I looked at the cards in front of us and said, "Yeah, it's a bear market". No sooner had I uttered that, than others began looking for a rally, albeit one within the context of a longer-term (secular) bear market.

This was something we had to take seriously. After all, no market goes straight down without a fight. We are bound to get some rallies along the way, even if they don't take us back above previous highs.

But even if we re-enter a period where the Dow Jones Industrial Average is building strength and making new nominal highs, as it did from 2003-2007, we still have to ask ourselves how well the stock market is doing in terms of stronger currencies and gold.

Why? Because an extended rally measured in terms of a steadily depreciating currency, like the dollar, won't tell us much about how our investments are faring in real terms, as investor Marc Faber likes to remind us:

"So let’s say someone said the Dow will go up to, oh, I don’t know, double. Say for argument’s sake, from 13,000 to 26,000. We would have to measure that increase –this doubling of the Dow Jones – in a hard currency such as either a foreign currency or in gold.

And if the Dow doubles because of money printing by the Fed to 26,000, it wouldn’t mean necessarily that economic conditions improved, but it would mean maybe that inflation picked up dramatically and that the gold price goes up three times."

Now we have a bigger perspective of what an upward movement in the Dow might mean. So let's get back to the question at hand. What would cause stocks to move higher (or lower) from here?

Well, as we've seen from Dr. Faber's comments, some good old-fashioned money printing just might do the trick. But let's assume that easy money conditions are only a partial prop up for the stock markets in the near future. Maybe there is some good news ahead or improving fundamentals for business and the economy.

Could that be why, as Richard Russell has pointed out, the Dow Transports have been so strong after bouncing off their January lows? Are the Transports seeing better business and better days ahead?

Russell recently noted that certain parts of the economy were doing well (energy, agriculture, mining) while others were not, and that outright bears and bulls are likely to be frustrated by the movements of the stock market in coming months.

Similarly, investment manager and author Jim Puplava recently noted the overwhelmingly negative sentiments on the markets in his recent survey of articles and research reports. The dour tone eminating from his reading pile has made him wonder if it might be time to start looking at the value in blue-chip shares.

Combine that sentiment with the ongoing moves by sovereign wealth funds to invest in shares of leading Western companies, and you have what looks to be some measure of support for the shares of large, blue-chip companies.

Still, investors like John Hussman and Jeremy Grantham are not totally convinced that the overall stock market is attractive, and they both cite valuation as a main conern. Meanwhile, trader and technical analyst Frank Barbera has been talking about a possible breakdown in leading European market indices which could lead US stock markets in a move to new lows.

Tough stuff, and there are bound to be interesting times ahead, for sure. What is your take on the markets, and how will you position yourself for the months ahead? Interested to hear your thoughts, all.