Global Market Rally Picks Up Steam

05/07/2009 12:00 pm EST


Mary Anne & Pamela Aden

Co-Editors, The Aden Forecast

Mary Anne and Pamela Aden, editors of the Aden Forecast, lay out the reasons they think the market’s advance may have legs.

The stock market has been on a roll. It just had its best month since 2000 and the Standard & Poor’s 500 has already soared [more than 30%] since its low on March 9, less than two months ago.

The Dow Jones Industrial Average has risen nearly 30%, and is now above its April high. The Dow Jones Transportation Average also rose above its April high, so these two important stock indices have now confirmed each other, triggering a Dow Theory bull signal which means stocks are going higher. And it’s not only in the US market; stocks are rising around the world.

China and Brazil continue to be among the strongest markets, and they still appear to be leading the way up for the other world stock markets. If they can rise and stay above their moving averages, that’ll be the first solid sign that they’re turning bullish and going significantly higher, suggesting the rest of the world likely will, too.

Currently, the leading indicator for the world index is extremely oversold, the most ever. It’s starting to move up, which is a good sign, but we need to see how things evolve before having more confidence that this rally is for real. If this rally turns into a new bull market rise, we’ll buy some new positions and/or switch into some stronger stocks.

On the bright side, the pace of the economic decline has been slowing. Consumer confidence surged the most since 2005, and sales of new homes also rose. Real estate markets are looking a little better, and the same goes for manufacturing.

In addition, if we compare the current bear market to bear markets of the past, this one already has dropped more than the 1973-74 and 2001-02 bear markets; only the crash of 1929-32 was more severe.

But one factor that remains a concern is the short duration of the current bear market. A 25-year bull market is unlikely to be corrected by a bear market that only lasted about [a year and a half]. So, based on timing alone, this bear market should run further.

Plus, the market never reached a level where stocks were great bargains, like previous bear market did, with P/E ratios falling below eight and dividend yields rising to between 5% to 8%. Nevertheless, even if this proves to be just a bear market rally, there’s a good chance the Dow will rise to near the 10,000 level, which would be a normal 50% correction of the drop since 2007.

We’ll soon see what happens but whatever the outcome, it’ll be extremely important for the economy since the stock market is an economic leader. A new bull market would be positive for the economy, while a continuation of the bear market decline would be very negative.

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