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Economic and Stock Market Cycles

February 1, 2012 – 6:02 pm

Determining the direction of the stock market in the short run is very difficult. There are so many unforeseen factors that can disrupt the most diligent analysis that calling an up or down market is akin to looking into a crystal ball. You need only look back to 2011 and the earthquake in Japan that disrupted the worldwide supply to understand how difficult projections can be. The economist that forecasted 3% growth in the U.S. can’t factor in natural disasters. They also underestimated the impact of the European debt crisis on our stock market.

This does not mean you should not make the effort to gauge the strength or weakness of the future economy, but one should always understand the weaknesses of that effort.

If the economy grows stock prices generally go up and if it shrinks it falls. The economic cycle runs ‘behind’ the stock market cycle. If one can broadly predict the economic cycle then it is easier to understand the stock market cycle. Stock markets move up at bottoms of the economic cycle and fall before the economy falters.

The effort is difficult but worth it, warts and all.

Good Trading
Steve Peasley

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