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The Cusp of Doom

Not counting today's action, the DOW has moved about 850 points in 5 weeks. Earlier this week Matt Nesto on CNBC reported that 88% of S&P 500 stocks were trading above their 50 day moving average so we can infer that investors are too far out on the risk curve chasing performance, but the market can still go higher. I'm not going to give you another hard-luck story, but I am getting hammered mercilessly in my short positions. The Ithaca Experiment Portfolio is on autopilot right now and will remain so for the foreseeable future despite the disappointing performance. Saying I am unfazed would be misleading, but the market tends to revert to its mean and there are plenty of problems looming on the horizon that could diffuse the bomb. Most financial planners will tell you it is best to check your portfolio on a monthly or quarterly basis and reallocate your positions once a year. This July will be the end of my fiscal year and a lot can happen by then.

Today is quadruple witching day when options expire and you should expect the market to rally, plus pick up some volume. Anybody who tells you you can't make or lose much money in a low volume market is out of their minds. This rally that started over a year ago has been very low volume. It just keeps slowly grinding skyward. According to the Stock Trader's Almanac 2010, the last week and a half of March tends to be historically weak, so maybe I'll catch a break by the end of the month. Sovereign debt default in Europe, the health care bill here domestically or some sort of terrorist attack could send this full throttle market to a screeching halt, but I doubt it. Both Meredith Whitney and Nouriel Roubini came out with statements on Tuesday saying they still see trouble for the markets in the second half of the year, especially when the Fed takes away the punch bowl and the markets kept moving higher. I'm not sure what impact Roubini has on moving the market anymore, but the prevailing theory on Whitney is that she called the sub-prime crisis and still sees another double dip in housing prices.

The majority of our GDP in the USA is comprised of consumer spending and a lot of consumer spending is dependent on housing prices. If housing prices decline, then our GDP will sink like a rock and if history is correct, so will stock prices. But this is a simplistic scenario here. It is a multi-faceted problem with many factors contributing to the market's decline like employment figures and credit card limits, both of which have been shrinking. Without money or credit, people just can't buy things. In the April issue of Kiplinger's Personal Finance, Jeremy Siegel wrote his monthly column about how stock returns were better than bonds and he may be right, but where I disagree with him is his projection of a 14.2 P/E ratio for the S&P 500 for 2010. Right now the current P/E ratio of the S&P 500 is roughly 20-21 without splitting hairs. For the P/E ratio to reach 14.2, we would have to grow profits by about 30% for 2010 and I just don't see that. I believe it is going to take many years before our economy is back up to speed. That doesn't mean the market can't rally. It has and it will, but eventually it has to prove that the fundamentals are sustainable and I don't see that happening for quite some time.