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Facts and Factors

October 22, 2010 – 4:56 pm

The market continues to rally slowly off the August lows. Maybe traders and investors were excessively pessimistic during the slow economic summer months when many pundits were calling for the double dip recession. The length and strength of this move could also be attributed to some very powerful factors, the foremost being earnings.

Earnings are continuing to surprise the experts. They can’t seem to understand that despite a high unemployment rate corporations can and do make profits. These companies were far ahead of the curve as they cut costs and laid off employees when the recession began, that any uptick in sales have fallen to the bottom line as profit. They also continue to operate on very thin cost margins. The experts underestimated the value and strength of overseas earnings as well. Over 50% of the S&P 500 corporations’ profits come from outside the U.S.

The other factor favoring this market’s rise is the elections. History is very consistent showing that stock prices rise 200 days after the mid term election. Maybe this rise is being pulled forward. Every one of the last 17 mid term elections 200 day period have been up and that rise is on average 18%. That is 68 years worth of data.

It also does not hurt that stock prices are not overpriced based on their earnings and their expectations of earnings.

These factors of course do not mean that the market has to continue the rally. There are dangers that could disrupt all these positive factors. The currency war could explode or Europe could fall apart as they try and rein in the generous social network that they can no longer afford.

The trend is your friend; let it run its course. As we all know the market tends to get extended on both the up and down side.

Good Trading
Steve Peasley

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