Investors Try to Read the Tea Leaves

05/18/2009 10:25 am EST

Focus: MARKETS

Terry Savage

Author, The Savage Truth on Money

We all seek certainty. But can any one really predict the direction of the market, accurately calling the turns over an extended period of time? It’s what we’re all hoping for as we seek the advice of “experts.”  After all, you don’t have to be perfect at calling market turns; you simply have to be right more than wrong—and let your profits run!

So last week, thousands of investors crowded The MoneyShow Las Vegas, attending seminars and panel discussions and meeting with financial services providers in a huge exhibition hall. I moderated some of those panel discussions and interviews, hoping to get at least some sense of whether the market had made a bottom—or whether this current up turn is just a bear market rally.

Not surprisingly, I found no certainty. On the two key forecasting issues of the day, the experts were about evenly divided (although our MoneyShow.com investors have some strong opinions on which way things are going).

Inflation vs. Deflation? 

Will the economy roll over into a long-lasting malaise, comparable to Japan’s “lost decade”?  And during that recession, with demand dropping and unemployment continuing to rise, will we see falling prices for assets such as real estate, commodities, and stocks?

Or will all the Federal Reserve’s credit creation and money printing and the government’s moves to rescue everyone from General Motors (NYSE: GM) to banks to insurance companies to distressed homeowners result in a massive inflation? Will the excess credit suddenly flood the market, rendering dollars less valuable compared to commodities and, especially, gold?

Opinion on the inflation/deflation debate was divided, but mainly it was a question of timing. Very few disagreed with the premise that the Fed's money creation would eventually cause inflation and a falling dollar. The issue was whether we first had to go through a much longer economic contraction or whether the increase in credit would stimulate the economy by the end of the year. That disagreement led to the second debate: whether stocks have already hit bottom.

New Bull Market or Bear Market Rally?

Bearish, says Joe Battipaglia of Stifel Nicolaus, who sees no lasting rally because the government’s policies of higher taxes, more control, and credit creation will hurt both the economy and the markets. Profits will be weak, and the recovery will be jobless. In that climate, how could stocks move beyond mere rallies from oversold positions?, he asked. He predicts more problems with financial stocks, and says “even health care won’t be the golden goose.”

Bullish, says InvesTech’s Jim Stack, who has been cautious for a long time. Several of his indicators have turned up, signaling a buying opportunity. He notes that “without a doubt, this is already one of the most hated bull markets in history!” Stack looks at his sentiment indicators, seen in overwhelmingly bearish newspaper headlines—even though the latest reports show consumer confidence improving. 

He also points to a positive divergence in “breadth”—the advance/decline line has broken above its January rally high. Plus, the “relative strength index,” which compares cumulative upward price changes to downward price changes, has turned up decisively. 

If even respected experts who have good track records can’t agree, it should make you feel better about your own confusion. Remember, the market is the place where investors agree to disagree—at a price! Only in hindsight will we know who was right. But what do you think about those two big questions? What’s next—inflation or deflation? Or neither? Are you bullish or bearish on the stock market? Please join the conversation and have your say.  

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