Friday, January 29, 2010

Dow 13,000 by July 4th?

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

It's been a very eventful start to 2010 on both the political and financial market front with no change in sight.

As we turned the page on 2009, I contributed a piece entitled, “Stocks Could Be Shaky Heading In To January”. The basic premise was that although price momentum remained on the positive side, there were too many small cracks developing under the pavement that would result in a small pothole forming. Although the stock market put in a very nice first week showing, there was little in the way of follow through.

On a recent CNBC segment called Earnings, Economic Data & the Markets, I offered a 1-2% short-term upside versus a 4-7% downside, odds that certainly didn’t favor the investor. Last week, we saw a 5% pullback in the popular indices as a "sell the news" mentality hit many of the earnings announcements along with the political saber rattling and concern about a possible credit bubble in China.

As hard to believe as it may be after such a strong year in 2009, that small bout of weakness went a long way in removing much of the excess and froth in the markets. Investor’s Intelligence, a popular newsletter survey, saw a 20% decline in the number of bullish respondents, one of the most dramatic one week moves in 20 years according to Jason Goepfert of That means a large number of previously positive newsletter writers jumped ship on the bullish case, something you would fully expect during a decline. Since these folks are usually wrong when acting in masse, that’s one positive sign that at least a short-term low is close at hand.

Additionally, the veracity of the recent decline in stock market internals resembled other periods where at least a short-term low was being hammered in. Market internals are things like the number of stocks advancing and declining on a given day, the amount of volume going into stocks going up versus volume in those going down and the number of stocks making 52-week highs and lows. In “normal” market conditions, the behavior we’re seeing now in market internals is usually seen at or closer to bottoms than anything else. In short, this all looks like your typical bull market pullback, like July and October 2009, to cleanse and digest the enormous gains seen since March 2009 as well as force out the weak handed holders or “Johnny come latelies”.

So far, the Dow Jones Industrials have gone from 10,729 to roughly 10,100 on Wednesday morning. While the jury is still out in the very short-term on whether we’ve seen the absolute low, I really don’t think it matters. The Dow could rally a bit, see another quick bout of weakness below 10,000 before taking off higher again or begin its march above 10,700 right now. On balance, I believe stocks are going to see higher highs this quarter and even higher prices by the time the Yankees break for the All Star game just after July 4th.

Over my 22-year career, I’ve learned that I am a much better investor when I buy into weakness rather than chase prices higher. As such, although I came into January with a very large cash position, I have been and will continue to use quick downdrafts as buying opportunities until proven otherwise. My upside target on the Dow is a minimum of 11,500 with 12,000 and even 13,000 not out of the question depending on how the anticipated rally unfolds.

Making money in this business (and the markets) or not losing money sometimes boils down to being in the right place at the right time, no matter how hard you work or how strongly you feel about a position. As I've shared many times, there's nothing wrong with a little luck, which is said to be the residue of effort. I'd MUCH rather make money for clients than be right on my analysis. I would be perfectly happy being wrong all the time, but having my clients make money week in and week out, month in and month out and quarter in and quarter out.

There should be a sign that says "Successful Investors... Please Check Ego and Pride at the Door".

Please feel to email me with any questions or comments at

Until next time…

Paul Schatz

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