Good Times May Not Roll Much Longer

Includes: AUY, TRX
by: Andy So

There seems to be a sense of euphoria in the U.S. stock market with the Dow constantly in the spotlight setting new highs. Highly visible companies like Google, Inc. (NASDAQ:GOOG) have hit new all-time highs and show no signs of slowing down in the short-term.

Investors should be reminded that the Dow Jones Index is comprised of a mere 30 companies. The Dow is not the best tool to judge whether or not it is the right time for investors to jump in the market. The Dow is a great tool to judge Wall Street's view of macro corporate economic conditions in the States. In the medium-term if the Dow continues to reach new highs, the economic profit of these large companies should trickle down to the small to medium sized companies in the food chain.

This is where I view the problem. I still sense that we are faced with unsure times. The global worries over an Avian flu may have passed, but they have been replaced with a looming nuclear threat by North Korea. Global Terrorism also continues to pose persistent threats to global economic stability. With the legislative elections coming up in the States, I would advise investors against making significant new investments in the market.

With a portion of the U.S. political foundation on unstable ground, I view making new investments as something of a gamble. If the foundation of your house was suddenly on unstable ground, would you continue to make new investments into home improvement or would you wait until the foundation was firmly reset? I think many homeowners would elect to pause new investments into their homes. There will be plenty of time for investors to catch-up post elections if the markets continue to rally.

From a speculative point of view, I am starting to feel like the market is being overly enthusiastic. I believe the market is starting to exhibit overbought conditions. I can share my own strategy for the short-term. I am planning to sell nearly my entire existing portfolio, except half of my gold positions, if both the Dow breaks 12,200 and the NASDAQ breaks 2,400 in the next month. I view these two numbers as key psychological benchmarks.

If the market meets my criteria I will sell as planned. I will continue to hold some shares of Yamana Gold Inc. (NYSE:AUY) and Tanzanian Royalty Exploration Corp. (TRE) as a hedge against a declining market. If the market doesn’t meet my criteria for a major portfolio sale then I will stay long on my positions. Although we may see the same tipsy-turvy activity the market has exhibited for much of this year in the short-term, I believe that market conditions will stabilize in the medium-term.

I believe a number of things can keep this market rising in the medium to long-term. One of the main reasons I see is a declining housing market. When folks cycle out of investing income into homes they tend to invest it into the stock market to look for better returns. During the .com cycle, when the market was at its highest, housing market prices were relatively flat and home rental prices in many urban areas were on the rise to spectacular highs. Once the .com crash occurred, housing market prices started rising and home rental prices started declining. This indicated a shift in investor sentiment in where to place available capital.

I expect that an influx of capital flowing out of the housing market and into the stock market will support continued growth in the medium-term. In the short-term the direction of the market seems unclear. We experienced a bullish run in the beginning of 2006, only to lead into a spring and summer of disappointing declines that erased several months of gains for many investors. Now that we have established a new high in the Dow, I suspect that many eager investors are again forgetting the declines we recently experienced. I don’t see global conditions suddenly improving, so I don’t see any concrete reason for the rally to extend itself from the short to medium-term. For the time being for the benefit of all investors I say, “let the good times roll”.