Don’s Outlook 3/27/09
The major stock indexes moved above their 50-day moving averages this week and held gains that were triggered by the grand announcements from both the Federal Reserve and the Treasury Department. The latter gains came on Monday following the announcement of the Treasury’s plan to deal with bad assets on bank balance sheets. Dubbed the Public-Private Investment Program, it invites big investors to join with Treasury to buy up bad debts, with much of the financing coming from the government.
The plan has many critics, and there are big questions about whether it can work, but at this point the market pessimists will not be swayed by anything but the greatest and most perfect plan, and many of the pessimists believe doing nothing aside from financial reform is the right strategy. In contrast to them, there are the eternal optimists whose hopes are lifted by every new government plan; each of which thus far has shown little effect. Therefore, some of the market activity probably came from the marginal investor who was unimpressed with previous efforts. However, a recent report on fund flows does show that hedge funds became net buyers of stocks for the first time since last October.
Either way, the market is moving higher. Sellers have not swept in to pull stocks lower, and volume has been higher as of late. Technical traders will grow more confident if stocks remain above their 50-day moving average, and the money being thrown into the economy will have some positive effect on economic statistics due to the sheer size of the spending. This makes going short an increasingly risky proposition, and the rally is likely to restrain early shorts a few more times before it runs out of steam. Although stocks may not reach their 200-day moving average above 1,000 on the S&P 500, another 80 points for that index, or 10 percent, doesn’t seem out of the question.
The problem with any forecast, however, is that the market increasingly moves based on major events and political interventions. While the nation’s financial power center may be moving from New York to Washington, D.C., we can only hope that Wall Street will continue to move to Main Street, and that the individual investor and taxpayer will emerge victorious from this multi-trillion-dollar tale. In next month’s Fidelity Independent Adviser, we will explore some of these issues in more depth.
