Josh Patt's  Instablog

Josh Patt
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I am a software engineer with 20 years of experience in high-tech, who has been investing in equity markets from an early age. I have been investing actively in shares of commodities related companies for the past 6 years.
  • Rally hitting resisitence 0 comments
    Apr 16, 2009 11:34 AM

    The current rally is hitting resistance around 8000 on the Dow. There are two common points of view that I have heard and seen a lot recently. The optimistic view says that the bottom is behind us and this is the start of a new long-term uptrend in the market. The pessimistic view says that this is a "suckers rally" and it's about to end with the market quickly falling to new lows. I can't agree with either of these views.

    The fundamentals simply do not support the optimistic view. Unemployment is rising, spending is down, profits are down. The result of all this is that both households and companies are hurting financially. There is no magic quick fix for this and it will take time before the economy improves. I believe that the markets will have a hard time keeping upward momentum without improvement in the economy.

    On the other hand, the market was oversold and a strong rally was the logical result. There is no reason why this rally cannot continue and some stocks still look like bargains. From a technical perspective, this rally can continue for good deal longer and still not signal the end of the bear market. So saying that it is finished now and the downtrend will continue immediately doesn't make sense.

    So what's the big picture here? People are seeing that the world hasn't come to an end and governments say that they will do whatever it takes to get the economy back on track. This has generated some optimism which resulted in the market working off its oversold condition and gaining ground on hope of a recovery. Since I do not think that a complete economic recovery is imminent, I believe that the market is moving up based on hope for a quick recovery that will not occur. However, the hope is there, and combined with the oversold state of the market is giving us a strong rally which may not be over yet.

    This rally has allowed a lot of investors, myself included, to make back some of our losses. This should be used as an opportunity to build up some cash and maybe get out of some positions that you probably shouldn't be in. So while the market may keep going up for another month or even another few months, I think it's time to start becoming more cautious. As the rally continues our level of caution should increase.

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