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Riding the Waves

August 19, 2009 – 9:12 am

China’s overheated stock market is cooling, something that was expected and actually healthy for future long term returns. The market overheated because of the anticipated sharp increase in economic activity which is currently underway.

Our stock market also should see a normal pullback though it did not nearly get as overheated as China’s. The Shanghai exchange was up over 90% this year whereas our stock market is up only about 10%. Don’t confuse being up 45% from the bottom for being up for the year. Our market was down 25% from January 1st to March 9th. It would have to go up 37.5% to make up the 25% fall just to break even.

The market is subject to waves up and down. We are seeing those waves played out in this recovering economy. The stock market rallied before the economic recovery which is normal and predictable. The economy is now transitioning from shrinking to growing but investors and traders are wondering exactly how strong the growth will be and whether or not they have pushed stock prices up too far or not far enough, thus a pause and probably a pullback until there are clearer signs. History teaches that this too is very normal.

The pullback, as large or small as it is, should be one that invites more investors, not push them away. The economy is recovering.

Good Trading
Steve Peasley

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