Saturday, August 22, 2009

Dow closes over 9,500. Now what?

I had said on August 8th, that the Dow could go as high as 9,600, the older high bound range, before dropping back to retest the lows in the Fall and that it would not go over 10,000. I also said the S&P 500 would not go over 1090 in that same post. So Friday's action was not a surprise to me. I used this surge to buy 1500 shares of TZA at $14.05/share. I believe I will surely make a sizable profit on these shares to offset the loses on earlier shares I still own. My total share count now is 9,000 shares.

Many of my friends are scratching their heads in disbelief over the markets rise and continued rise. Fed Chairman Bernanke's statement added gasoline to the "irrational exuberance" late in the week. My previous post showed the P/E ratio of the S&P 500 has reached a high of 145 before yesterday's surge, in almost a straight climb up into the stratosphere, as the chart demonstrates. This is all in preparation for the Fall and the usual volatility as Options expiration approaches for September and October.

Will this year have the expected drops we are accustomed to during these periods or will it give us another head fake and surge ahead again? My betting has been that we will retreat to retest the lows. However, I must admit, this does test one's metal and fiber. I am expecting a slow, and disappointing to Retailers, Christmas shopping season. There are many unemployed on the brink of bankruptcy and facing foreclosure of their homes, as unemployment benefits lapse as the Congress tries to pass a bill to continue benefits for another 13 weeks. This Bill passage will ensure those not counted as unemployed get counted again and this will push the unemployment rate to 11% in the 1st quarter.

Will more jump on the bandwagon and invest in the stock market here at these levels or will they try and preserve capital, as I have said many should? I can feel it, can you? It is the same feeling I had in my stomach in the year 2000 as the Nasdaq spiked up and up and up and everyone jumped on board not to miss any profit which seemed so easy to make. It was the same feeling when people in Las Vegas were buying homes in a sizzling market expecting an automatic easy gain of $60K per home. It was easy money until the bubble burst. It is my opinion, the same thing is starting to happen again. We have not had any normal market pullbacks and those watching on the sidelines are seeing this as a way to regain their sizable portfolio losses.

There is an expression worth saying here now. It is this, "Fool me once shame on you, fool me twice and shame on me." I didn't get fooled and caught up in the 2000 bubble and warned many in my newsletter of the pending drop I saw and I had advised my readers to go into cash. I took a lot of heat then as many were riding the rise hoping to continue to see their portfolio on paper go into the stratosphere. They didn't take profits off the table and when the market did finally drop precipitously, their paper gains disappeared and they lost much of what they owned. This was called the bust. If you have made any profits and are feeling good, consider taking them off the table and pocketing them. Don't let greed drive your decision making. Pat yourself on the back and watch the market from the sidelines for a while. We are in dangerous territory again! Good luck.

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