CALM BEFORE THE STORM

Stock market trading was insignificant today. What can we learn from it?

We can debate when the rocky road began for the stock market this year, but to me it began in late July. The Dow dropped 200 points on July 27, 2011. Let’s call that a flare. Why not? America was on a disastrous course for a long time, long before late July, but that’s when the stock market started to freak out.

Traditionally, the stock market is always more euphoric during the first half of calendar years. Reason: there is more to speculate about – 2, 3, or even 4 quarters are yet to be lived. There is plenty of room to speculate. The year has just begun.

But late in the third quarter (where we are now) and into the fourth quarter, there are fewer things to speculate about. Just a few months remain. The year’s almost over. And by now, everybody on Wall Street pretty much knows the score.

That’s why most severe stock market corrections occur in September and October. Fair valuation is most easily ascertained. Overzealous speculation can be swiftly corrected with just one quarter remaining. And so it happens. Consider the midpoint of the action zone to be “fair valuation” as shown in the picture below.

1551vDJIA-11top

As you can see, the Average can’t hold the mid point – fair value, as defined by current and historic economic valuations. That’s the stock market predicting recession.

Now, recession is not new news if you’ve been following my blogs. Instead, this picture is another piece to the puzzle – another market fundamental pointing towards recession – another indicator of lower stock prices.

The weekend is a great time to take a breather and plan your next move. Prepare your assets for a rough road. If you need help, feel free to contact me.

Enjoy the weekend!

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