Monday, August 17, 2009

Is the stock market about to crash?

I see headlines and stories suggesting that maybe the stock market is about to crash or have a "sharp decline", but they are quite misleading. As I have said many times before, traders and short-term speculators make their money on any market moves. So, if the market is trading in a relatively narrow range, sometimes these folks actually engineer a sharp decline by cherrypicking some news stories and then concocting their own story (e.g., weak consumer spending) and then conning everybody else into buying that story and dumping stocks. It is a tried and true tested strategy. And it works. At least for awhile. Eventually, after a few hours or days or maybe a few weeks their story and engineered decline runs out of steam and the market recovers. That looks exactly what is happening right now.

Will this be a buyable dip? Probably, maybe. After all, virtually nobody of note believes that the economy is not in the early stages of a recovery of some sort. The big unknown is what market level will present to optimum entry price for the dip. That I could not say since I have no idea how many people will buy into the cockamamie trader story and misguidedly dump stocks.

To be crystal clear, everybody of note already knows that consumer spending is relatively weak and will continue to be so until later in the recovery. Consumer spending won't pick up dramatically until after employment stops declining and that will not happen until after business investment picks up. To be even more clear, look for business investment to pick up, then employment picks up, then consumer spending picks up.

Also, I see a lot of headlines and stories about consumer confidence, but consumer confidence is primarily a lagging economic indicator, or at best a coincident or maybe even a very short-term leading indicator, but not a longer-term leading indicator for the economy. Consumer confidence will remain relatively weak until employment picks up. Everybody of note already knows that. A lot of traders and short-term speculators do know that as well, but they also know that there are plenty of gullible "investors" out there who do not know it and can easily be suckered into buying the trader story that weak consumer confidence right now will lead to longer-term stock market declines.

The real bottom line here is that the stock market remains in a trading range and that traders and short-term speculators are just trying to "do their thing" and force the market to head back down towards the lower end of the trading range. Whether they will succeed or how far they can manipulate the market to fall is anybody's guess. In any case, this is simply a short-term move and not an indication of the longer-term market trend.

If you are a true, longer-term investor simply ignore this kind of market chatter and focus on the longer-term. Or, maybe even consider buying on the dip if prices look attractive enough.

-- Jack Krupansky

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