Massive Rally Ahead?

by JDH on June 23, 2012

Is a massive stock market rally starting? Will we witness a summer/fall rally that will take the markets to new highs in time for the November elections?

On the surface, that seems like a ridiculous notion. Official government unemployment remains high, and the real numbers are much higher. The Fed has printed, and continues to print, massive amounts of money; ultimately that will be very inflationary, and that’s not good. Interest rates are artificially suppressed, which negatively impacts capital formation (why save money when I can’t earn any interest)? The case for a market crash is clear and obvious.

However, allow me to offer an alternate viewpoint: the market is headed for new highs. Why?

First, everyone is negative. Since the crash of 2008, many investors have departed from the stock market. They have fled to safety, and their money sits, earning virtually no interest, in bank accounts and T-bills. Watching the Facebook debacle has no doubt confirmed their belief that the stock market is a rigged game.

As a contrarian, the greatest opportunities occur when everyone is negative.

The fundamentals appear negative, but what happens if something positive happens?

There are some that argue that the Supreme Court decision on Obamacare will be irrelevant, but as a Canadian with “no horse in the race” I disagree.  Today, there is uncertainty.  Next week, some of that uncertainty may be removed.  If that happens, it’s possible that the market will rise.

A second reason for a possible market rise is technical.

Dow JonesAs is clear from the chart of the DOW, over the last three years the market has risen.  This could be a new bull market, or it could be simply a rally in a bear market.  Which is it?

I have no idea.  All I know is that in the last three years we have had three tops (as indicated by the horizontal red lines), which had led to corrections, followed by new highs.

Is it inconceivable that the current bounce that started at just over 12,000 at the beginning of June could go from Friday’s close at 12,641 to over the spring high of around 13,250?  That’s perfectly possible; that’s only a gain of less than 5%.  It could even happen this week.

Finally, being the cynic that I am, I never discount the likelihood that markets are heavily manipulated.  This is an election year in the U.S.A.  The incumbent president wants to get re-elected.  If the stock market crashes everyone will realize the economy is in a shambles, and he’s gone.

However, if the Fed keeps printing money and inflates the markets to new highs, he can stand up and say “look, the market is up, everything is great!”  That’s a compelling argument, and greatly increases his re-election chances.

So here’s my plan:

I will continue to hold my precious metals stocks.  For me, they are long term holds, and stocks like RGL.TO – Royal Gold Inc. pay a dividend higher than what I can earn in a bank account, so there is no disadvantage to holding.  If the market does take off, it’s possible all stocks go up, even gold stocks, so I win big.

If the price of gold gets hammered (since we sell our gold to buy stocks, depressing the price) and my gold stocks go down, so be it.  It’s temporary, and only means that the stock market crash will occur later in the year, after the election, or next year, and all of these stocks will bounce back to new highs.

I may also place a very small bet on the upside, perhaps something like FAS (an ETF offering 3 times leverage to the upside on financial shares).

Please note: this is gambling, but if it’s a small bet, and if it works the gains could be big; if it doesn’t work, the loses won’t be significant.

Please note that I am not arguing that all is right in the world.  We still have massive problems, and a depression will probably be the only solution.

However, the next five months, leading into the election, a big rally is very possible, so it’s important to be prepared for all possible outcomes.

Thanks for reading, and have a good week.

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