For the past couple of months, two things have crimped the liquidity moving into the economy: high-energy cost, and a revaluing dollar. Interest rates began to move higher in early July 2003, while the dollar began to revalue around the same time. Consequently, this has had a braking effect on our economy by slowing exports and tempering the energy market to move lower.
Was this the reason why I had a gut feeling (and which I stated in the July and August issues of the Investment Tracker) the market was ready for its first real correction since the S&P500's double bottom in March. I realized that this market, unlike the market of the 1990s, was not the only game in town. It has had to share the country's investment dollars with several other investments, namely real estate, energy, precious metals, and a growing foreign market.
More money will move into fixed assets, such as notes, bonds, and CDs, once interest rates move a bit higher. This is not to say, however, the stock market will have had it for the current business cycle. It just means less money will go into stocks when other investments are doing relatively better than stocks. In effect, this will make the market vulnerable to corrections every time it reaches a point where sophisticated investors see its price compared to its risk to reward as being more risky than potentially rewarding. For now, it appears that that point is Dow-9,600, S&P500-10,200, and Nasdaq-19,500.
During the 1970s, when the stock market was under similar pressure from similar investments, the Dow was capped between 9,000 and 1,000. It made an attempt to go past its cap at least eight or nine times in the 1970s. It would correct anywhere from 30% to 50% after each failure. I do not believe we are currently in such a severe correction. The reason is simple, gold has been capped at $390, energy will need OPEC's help to scale $30 a barrel, and real estate is going up for the most part, only in the most favorable locations. The Dow is likely to correct and then attempt another time to move above 10,000. Will it happen?
In the meantime, this is a market of stocks, not a stock market. The difference is it works best for a good money flow analyst. So pick stocks for your portfolio from the gold sector, 21 small caps, and propicks, and stay tuned.
