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Is this rally for real?

Back in early August we wrote “we think this is the beginning of a significant move up in stocks.” The market promptly laid an egg in August. Serves us right for making a short term market call---that’s always a mistake.
So here we are again near the top of the trading range that has trapped the market since late last year. September has been excellent for both the market and our portfolios, but will the market roll over and die just the way it did in August, late June, and May?

We won’t make the same mistake we made in August by answering that question for the short term, but we need to have an opinion about where stocks will be in the next year.
We think the odds favor breaking out of this sideways pattern on the upside instead of the downside. Here are a few reasons for our optimism:
  • The debate about a double-dip recession has been settled. We are not headed back into a recession this year or next. The economic numbers have been strong enough to settle that argument.
  • As we have said many times this year, business profits are very strong, cash balances within corporations are at record levels, and corporate debt is low. When corporations are this healthy the stock market should do well.
  • Taxes may not go up in 2011. Predicting what Washington will do is even harder than predicting the stock market, but there certainly is a lot more discussion of extending the current tax brackets beyond 2010 than there was even a month ago. Whether you think this is a good idea or not, the market is likely to react in a positive way to lower than expected tax rates in 2011.
Our portfolios have reached the high point of the year, similar to the levels we saw in April. We don’t know what the next month will bring, but we do think the remainder of the year will treat stock holders well.
As for next year, the history of a President’s third year in office is very positive for stocks. While we’re not big fans of indicators like this, let’s hope history repeats in 2011.

Disclosure: "no positions"