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It is Time to Buy!

April 13, 2009 – 12:34 pm

Earnings reports for the first quarter picked up speed this week with the first big blue chip company Alcoa reporting poor numbers after hours on Tuesday and Wells Fargo reporting surprising record profits this morning. The market sold off Monday and Tuesday in anticipation of a tough earnings season but Alcoa, with its bad numbers, held up well on Wednesday because those bad numbers were expected. Some analysts actually upgraded Alcoa based on future numbers. The phenomenon of bad numbers or bad news not affecting the market or individual stocks is well documented. It is simple to understand but difficult to anticipate. When investors expect something in the future they price it in today. So bad earnings for the first quarter has been expected and thus if we get them it should not affect the market. Of course there is a large exception to this quirk of the market and that is if the earnings come in worse or better than expected. The devil is always in the details; Alcoa’s bad numbers were expected so the stock did not fall, but Wells Fargo’s good earnings were not expected so it went up sharply with the entire market this morning.

So what can you do about the daily gyrations of the market and individual stocks? Take a bigger picture perspective. Is the economy at its worst? When will the economy find its feet? When will the housing market start to improve? What is happening in interest rates, inflation, deflation and the money supply? After stepping back, your conclusion should be that we are in a very deep economic hole. It is deeper than most others and stock prices have collapsed over the past year.

The market expected this deep hole and it appears it is now expecting some kind of recovery. Always, stock prices lead the economy both down and up. It appears we need to be buying stocks not selling them. The market is one of the strongest leading economic indicators we have.

However, don’t expect the market just to move in one direction. We had a very steep downturn for the first two and half months of the year after a very bad 2008. Then we have had a steep rise in three weeks. Both moves were too violent to be sustainable. Expect a pullback of the recent rise. That pullback should give you an opportunity to exit any short positions and start to add long positions. Use any weakness. We had it this week.

It is time to be buying! The bottom is in and will hold. Retesting may happen but my guess, and it is a guess, is that a retest of the recent bottom will only be a half hearted effort, maybe retracing 50% from this steep up move. Resistance on the up side is at 8,000 on the DOW and 800 on the S&P 500. It looks like it is being broken to the up side. The charts are fairly clear about this resistance and this week has shown us that the market will struggle in this area. It struggles in this area because, we the investors and traders, see it on the charts and make it happen by our reactions. Charting is nothing more than watching human nature at work.

Still it is time to buy on any weakness. The market is on sale. It has been rare that it has been this inexpensive. Are you going to wait too long and be one of the last ones to enter, thus missing the upside? If you are in, stay in. If you are out, buy. We will be buying. We have been doing so very slowly waiting for some weakness to be more aggressive. We will exit the last of our short positions and buy more aggressively if we get the expected pullback. Earnings season is going to make it interesting which is another word for difficult. Don’t let fear paralyze you.

There is an old saying, “the market crawls up a wall of worry”. Are you worried? If you are, buy. Just don’t be too aggressive!

Good Trading,

Steve Peasley

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