Be Careful Believing the Overly Bullish Stock Market Commentators

Earlier in the day, a stock market commentator had this to say about the Dow. He said if the Fed did nothing, the Dow would finish up around 16000. If they cut just 0.25%, it would finish at 18000. If the Fed cut 0.50%, it would finish up at 20,000.

With everything that is happening, how can these guys be so bullish? I think that Tuesday’s stock market told us a lot about this environment and what might be in front of us.

In just a matter of moments, the Dow Jones Industrial Average dropped 240 points as the Federal Reserve Board decided to decrease the federal funds rate 0.25%. A disappointed stock market reacted extremely negatively to that news. The stock market felt like the
Federal Reserve Board should do much more in its effort to fight what looks like an inevitable recession.

Should the stock market be so surprised? The answer is both yes and no. Yes, because the Federal Reserve Board has been very market friendly. It has made many decisions and taken actions to continue to prop up this stock market. This is why we have witnessed all of the bad news in the credit markets and yet it hasn’t dramatically affected the stock market.

At the same time, the stock market shouldn’t be surprised because the regulators need to allow these markets to work themselves out without a lot of government intervention. It is the healthiest way for us to get through this credit crunch.

So, after a rough November, what does this say about December? December is typically a strong month for the stock market. This type of weak market activity is a little unusual. However, it also goes along with my outlook for the stock market. I still feel that there is a good chance that we have started into a bear market.

It is important to make sure that you are not taking a tremendous amount of risk. My indicators are still showing that a bear market definitely cannot be ruled out.

If that is the case, go back to the three things that you can do in this type of situation and make a choice. First, do nothing. That is not a good choice. Second, reduce your exposure to stock by investing defensively. Third, invest offensively. There are ways to make money in a declining market.

Now some may think that I am completely off base and overreacting to one day of a sell-off. I am just putting the pieces together and the picture doesn’t look promising.

· Weakening economy
· Consumers facing massive amounts of debt
· One of the most severe credit problems we have seen in decades
· A severe real estate bust
· A market that is losing confidence in the Federal Reserve Board

Bear markets and recession are never announced ahead of time. You just have to look at the clues.

Copyright © 2007 Prudent Money and Bob Brooks. All rights reserved.