Thursday, April 23, 2009

Will We See A Pullback?

Everyone has been calling for a pullback to this great rally we have had, but I don't think it is going to happen, and here is why. Sure, the market really shot up, and I have always said that when a stock moves up really quickly, and nothing fundamentally has changed, then you can bet on a pullback. But with this market rally, I the market has fundamentally changed. Things in the economy are looking better, unemployment might finally show signs of a decrease in the rate that jobs are lost. Credit is getting better, home sales are jumping up, and manufacturing sales are getting better. Mortgage rates are so low that they are finally enticing new home buyers and making it able for people to refinance to a rate they can afford. Firms are taking aggressive cost cutting measures and banks seem to be getting their finances in order. The stimulus package is working, many small infrastructure businesses have said they have seen their orders increase thanks to the stimulus money. When the stress tests come out, I think we should be in for a pleasant surprise to find out most of our banks are going to be okay. The Treasury came up with a decent plan to help banks cleanse their balance sheets. In general, investor sentiment has really improved, we passed the moment where the earth was going to end and everyone was a bear. 

The story here is sure the market shot up in a heart beat, but so did the fundamentals. It is only when stocks shoot up faster than the fundamentals do that you see a pullback. The S&P currently is at 850 and earlier in the year it was at 930. I can say this, things look a hell of a lot better now then they did back in early January and the market hasn't even reached those levels yet. So if you are counting on a pullback simply because we "deserve" one, don't. People and institutions are too scared of missing out on another huge rally like the one we just had. Any small pullback should bring in a wave of buying, keeping us afloat. We did see a 40 point pullback a few days ago, and what happened after that? We've been rallying.

If a pullback does occur, it is because something will fundamentally change in the economy, not because the stock market is bound for a pullback. When the market changes along with the fundamentals, it is not bound to do anything.

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