The stock market has been posting gains the past few days.

After two very tough months to start 2009, what could go wrong?

Plenty, especially if you are focused on just the Dow Jones Industrial Average.

The Dow Jones has many financial-related companies, like Citibank, JP Morgan, Bank of America, American Express and quasi-financial stocks like General Electric and Caterpillar Tractor, which perform extensive lending and financing.

Remember, the financial stocks have led the charge the last two weeks, after Citibank's CEO circulated a memo to employees announcing the bank did well in January and February.  But two months do not make a full quarter, and the banks have posted significant losses in the previous quarter, as mentioned before.

In fact, JP Morgan CEO James Dimon mentioned on Friday, March 27, 2009 that March is shaping up to be a difficult month.  And financial stocks promptly swooned, bringing the rest of the market along with them.

What else could go wrong?

On Tuesday, March 31, we will finally hear the final revised 4th Quarter GDP numbers.  Remember, one month after each quarter, we get preliminary GDP numbers.  Then one month later, we get revised GDP numbers.

Then, at the end of the following month — which is also the end of the NEXT quarter — we receive the final revised GDP number.

The market took a beating on each of the previous two GDP announcements at the end of January and also February 2009.  If the number on Tuesday is revised downward, watch out.

We also will receive preliminary 1st quarter GDP numbers (1st quarter 2009) one month from now, at the end of April, 2009.  Fasten your seat belts.

Every time I see headlines about future budget deficits, I keep telling myself "that is a weather forecast!"  Most folks read the headline, perhaps scan the first paragraph, proceed to get bummed out and turn on the NCAA Tournament.

Just drill down into this a bit.  The forecast is for a $9 trillion deficit to amass between now and the next ten years.  Ten years!

Ten years ago, we were all worrying about Y2K.  Remember?

Buried in the next-to-last paragraph was this little golden nugget.  Read this whopper:  "Long-term deficit predictions have proven notoriously fickle — George W. Bush inherited flawed projections of a 10-year, $5.6 trillion surplus and instead produced record deficits — and if the economy outperforms CBO's expectations, the deficits could prove significantly smaller."

There is so much ink spilled every day in the financial media that is essentially nothing more than predictions, or a public relations spot for something else.  Unfortunately many of the PR and predictions become headlines.  Our decisions can be swayed by too many headlines that are merely predictions or opinions.  I've come to the conclusion everything written by the financial media has an agenda attached to it.  Or said another way, everything written by the financial media is intended to make you do precisely the wrong thing.

I cannot help but laugh when I see some "expert" interviewed about the stock market, and the excuses/reasons given why markets went up or down that day.  "The market is worried about inflation."  Later the same week "deflationary fears rattled the market."   Look, the market is not that smart — or that "forward-looking."

Don't get hung up on the Dow Jones.  The Dow Jones may not be a "relevant" yardstick for you to use.  After all, it's only 30 stocks…and you might not own ANY of them.  And avoid predictions and projections.  It's just a waste of time.

Take a walk with me down Memory Lane:

1973: S&P down over 17%  (ouch)
1974: S&P down over 29%. (ouch again)
The bottom for the S&P was reached in October 1974.
And the bottom was reached — yet again — in December 1974.

There was no advantage to jumping 100% back in, immediately.
October 19, 1987: S&P 500 drops 20% in a single day.
October 20, 1987: S&P 500 rises 5%.  And on October 21, 1987: S&P 500 rises 10.2% (a single-day record, until 2008!)
But if you jumped in then, guessing the "market was OK"…it wasn't until the following January that you got back to even.  In fact, you were sweating — in December 1987, the market was back to where it was on October 19th.

There was no advantage to jumping 100% back in, immediately.

The S&P fell 20% throughout mid 1998.  And, again, after a "bounce rally," the market slipped back and re-tested the low.  It took many more weeks and months to get back to the same levels after the bounce.

There was no advantage to jumping 100% back in, immediately.

Summer 2002: The S&P 500 dropped 22%, falling to 785 in late July, 2002.  So…was that the bottom?
After rising 21% over the next furious few weeks (to 950), the S&P 500 again fell all the way back to 785 again in October 2002.
However — in December 2002, the S&P 500 was back at 950.
But — wait!  In March 2003, it was back at 785 — again!

There was no advantage to jumping 100% back in, immediately.

Don't misunderstand, we are facing one the single BEST buying opportunities right here.

But "right here" doesn't mean "this week" or maybe even "this month."  This "opportunity" may be here for several months.

Exxon reported nearly $12 billion in profits for the previous quarter recently. $12 billion! More net profits in one quarter, than ever recorded in the history of mankind.

And what did the stock do?

It went down.

Numbers like $12 billion generate emotional responses: anger, jealousy, envy, and even pride. The media does a good job of stirring the pot. Once the emotion subsides, a lot of people start to realize that Exxon is one of the largest employers in the United States, along with being one of the biggest taxpayers in the United States as well.

But there was something in the earnings report that really got my attention — maybe you saw it, too.

In addition to reporting record earnings, Exxon also reported their total production declined. Companies like Exxon simply don't have the tools in place — or even available — to do more drilling or exploration. They simply don't have the infrastructure to increase production.

Now let's talk about their stock. And a short lesson in relative strength!

When compared to other oil stocks (Exxon's peer group), Exxon stock has been on a relative strength sell signal since 2001. While this member of the Dow Jones has done well compared to the S&P 500 and the other Dow Jones stocks, Exxon appears to be a weak-kneed Willie getting sand kicked on it by some of the other bruisers in the sector.

And now that Exxon has broken the support line, and the sector is falling out of favor…well, it's really starting to lead the parade out of town.

I suppose $12 billion just doesn't get you what it used to anymore, does it? This company is posting record earnings, record revenues, record profits… and the stock goes down.

Oh…one more thing. Can you guess what stock you will find listed as the first or second largest position (investments) in most large-cap growth mutual funds? Here's a hint…it used to be called Standard Oil.

Go ahead and read the headlines — just don't base your entire investment decision on headlines… like most people do.

Frequent readers have seen earlier posts where I have discussed option expiration week and the volatility that comes with it.  But there was scant mention of option expiration at all this week.  Options expired on Friday and the Dow Jones dropped 220 points.

Instead, we heard lots of "experts" speculating with reasons why the market might be falling.  Most of what I heard this week was "blah, blah, blah."  I'll say it again, the third week of the month (when options expire), we typically see more volatility in the markets.   Write that down.

Now this past Friday (June 20, 2008), we had "quadruple witching."  This happens when when stock options, index options, index futures, and single stock futures all expire on the same day.  "Quadruple witching" will happen again in September and December this year.

The Dow Jones industrial average dropped below 12,000 today, March 7. In technical terms, this is a significant move. On my point and figure charts this represents another sell signal and tells us that the average may have further to fall. Not that I want to be in the prediction business, but it appears there may be at least another 5% fall coming our way.

Additionally, the S&P 500 index also gave a sell signal when it broke below 1300 today. Remember that a large percentage of the S&P 500 index is made up of financial stocks and technology stocks, which have both been taking it on the chin.

It's important to remember that "market bottoms" are a process — not an event. It's very rare that the market will go down and snap right back. And when you consider some of the news headlines that are driving this market lower and lower, I don't think we'll get a turnaround anytime soon.

We are on defense, it's time to focus on asset protection.

In my previous message, I talked about how we moved to defense
twice in 2004, but it seemed the market didn't go down either time.

If the markets weren't going down, why get defensive?

It's an example of where the "generals" stay to fight, but the
"soldiers" were leaving the battlefield.

Sometimes, when the market is on defense, the major indexes, like
the Dow Jones and the S&P 500 remain flat.  But you still lose
money in individual stocks. 

It's important to remember that the Dow Jones is a basket of just
30 stocks — 30 stocks that we may not own. 

And the S&P 500 index is a "cap-weighted index."  The largest
names — the top 25 names in the S&P 500 — control approximately
36% of the weight in the index. 

Meaning the remaining 475 stocks in the S&P 500 — combined –
represent 64% of the index.  If the big names at the top of the
list are flat, it looks like the market is going nowhere. 

But YOU might be feeling like you're the only guy or gal in the
world losing money.

Remember, there are times when the indicator will tell us to play
defense, but it appears that the markets really don't go down at
all during that phase. 

But your individual stocks may be getting crushed.
 

Tom

Thomas Mullooly
Mullooly Asset Management LLC
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