Stock Market at a Crossroad: It’s Shake or Bake Time

Okay, so we’ve had the grandest of grandest rallies. The Dow Jones Industrial Average is up a whopping 89% since its March 9, 2009 low. The majority of investors missed this great opportunity to make money in the stock market, because they were selling on fear instead of buying into it. (Hopefully the majority of our readers heeded our suggestion to jump into stocks with both feet in March of 2009 and held them all the way into 2011.)

But today, the stock market, as measured by the Dow Jones Industrial Average, is at a crossroad. At its current level of 12,229, the Dow Jones Industrials faces major resistance: breaking through the 12,400 level. For the Dow Jones Industrials, 12,400 was a key resistance level in 2006, 2007 and 2008.

If the Dow Jones Industrials breaks above 12,400, the next level of resistance for the world’s most widely followed index is 13,000. But once 13,000 is broken through, there is very little resistance all the way up to the market’s all-time high of 14,164, which was set back in October of 2007 (the good old days).

Should the Dow Jones Industrials break through 12,400 and then 13,000, we’ll ultimately see new record highs by the market. If this happens, Ben Bernanke will be seen as a genius. He not only saved us from the Great Depression II, but he also made American investors rich again, and Bernanke should be crowned the first Emperor of America for it, just like Napoleon became Emperor of France.

So it’s shake or bake time for the market. It either “shakes” its way through 12,400 and then 13,000, or it “bakes” its way back down. Unfortunately, I’m seeking cracks in the cake-mix box.

Aside from long-term interest rates rising so sharply and so many advisors turning bullish on the stock market (two major negative factors for a contrarian like me), our publication Lombardi’s Profit Taker (2/7/11 issue) says that corporate insider selling of the eight largest companies that make up the NASDAQ 100 is near record levels.

More and more, I’m getting the feeling that this is becoming a suckers’ rally. And I don’t want my readers getting suckered in! Tread with caution. Sure, there could be some more steam left in this rally, but stocks are getting expensive again.

Michael’s Personal Notes:

The U.S. real estate market can’t get a break.

Virginia-based Freddie Mac said Thursday that the interest rate on a 30-year fixed mortgage rose to 5.05% last week—the highest level in 10-months. As you have been reading PROFIT CONFIDENTIAL over the past weeks, you have heard how I have been sounding the alarm over rising long-term interest rates. Well, those rate increases are now hitting the mortgage market.

I easily see the rate for a 30-year fixed mortgage going to 5.50%, an event which will continue to hamper the housing recover in the U.S. The Dow Jones U.S. Home Construction Index confirms this story. While the Dow Jones Industrial Average is up 5.6% for 2011, the index comprising the largest new homebuilders in the U.S. is going in the opposite direction.

More pain ahead for U.S. housing, but I continue to believe that 2011 could be the bottom of the housing market in terms of price. The percentage of buyers paying cash for homes they buy in the U.S. has reached a record high. When the cash buyers move in, they smell the bottom of the market.

With about one in five homes in the U.S. (with mortgages on them) worth less than their mortgages, rising interest rates place more stress on those homeowners and simply increase defaults, which lead to even more foreclosures. The biggest cleansing of the U.S. housing market ever continues.

Where the Market Stands; Where it’s Headed:

The yield on the 10-year U.S. Treasury hit a new high for its advance yesterday, up to 3.7%. Several weeks ago, I predicted that the yield on the 10-year Treasury would break through four percent, and that opinion is unchanged. Long-term interest rates are up 54% since last October. Once the yield on the 10-year Treasury hits four percent, long-term bond yields will be at their highest level since July 2009.

The rise in long-term interest rates is significant and I have a gut feeling that the market is starting to pay attention to it. While immediate term the bear market rally is alive and well, the rally is faltering.

The Dow Jones Industrial Average opens this final trading day of the week up 5.6% for 2011.

What He Said:

“I’ve been writing to my readers for the past two years claiming that the decline in the U.S. property market would not be the soft landing most analysts were expecting, but rather a hard landing. My view remains unchanged. The U.S. housing bust will be cut deeper and harder than most can realize today.” Michael Lombardi in PROFIT CONFIDENTIAL, June 13, 2007. While the popular media was predicting a bottoming of the real estate market in 2007, Michael was preparing his readers for worse times ahead.

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