The Economy & Stocks – What Comes Next?

Are you nervous about the economy? Are you afraid that stock prices might drop further from here?

Amateur investors typically get nervous at times like this. The nice uptrend in stocks from March 2009 until April 2010 has now faltered over the past 3 ½ months. Suddenly many press releases and articles on investor sentiment that were so rosy previously are suggesting we’ve entered another bear market and that the U.S. may see a “double-dip” recession. Without being an expert on the stock market or the economy, how can you really know what is going on?

The answer: just look at stock prices.

The Dow Jones Industrial Average is an index that averages the prices of 30 major stocks. These stocks are from a diverse list of industries and sectors, giving us a snapshot of how the economy looks overall. Therefore, the prices of the stocks in this index indicate what the smart money thinks of how the economy is doing.

So you don’t need to be an economist; you just need to see how amateurs and professionals have voted with their money. This can be seen in the stock charts.

This is a chart of the DJIA from the March 2009 low to mid-August 2010. This is a good chart to look at because this is the big picture. This is what is really happening with stock prices.

You can see we had a full year of stock gains from March 2009 to April 2010 and the DJIA went up from around 6,800 to over 11,200. That is a gain of 65%. Since the high, we have had a pullback of 10-15%. That is just a tiny pullback after such a big rise in stock prices. It is perfectly normal for stocks to take a breather and go sideways, more or less, for a few months until the bull market resumes. The market is acting very much like the run up in stocks in 2003 and the sideways action in mid-2004. In fact, I predict future stock prices for the remainder of this year to act much like they did in the Fall of 2004.

If the smart money really thought that the economy was in big trouble, it wouldn’t be going sideways after a big run up – it would be going down. In fact, if the smart money really believed such bad things for the economy, the big rise in prices never would have happened in the first place.

You may have noticed that, certainly not all, but many companies have posted excellent earnings in the last earnings season. That is the most important thing to watch right now, because that is what drives stock prices, and watch the DJIA. Ignore the pessimistic articles. They are written mainly by people trying to scare you to death so you will buy something from them.

I offer Free Stock Picks for Investors at:

http://tradergstocks.blogspot.com/

You can see this article with the charts included at:

http://traderg-ezine-articles.blogspot.com/