Look For Market To Correct In May | Investing

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In our Global Outlook Forecast we predicted that although we felt that the markets would start turning bullish in the second half of the year, we were expecting some very negative news from the financial sector in April, where we said we would see some serious write downs.

The write downs have certainly been noteworthy to date, but please understand that there is still plenty more credit liquidation to come. Last week we saw GE missing its earnings by 8%. We like GE and have been thinking of adding it to our Templates, but have yet to do so because of its exposure to the credit crisis. In announcing their disappointing news, CEO Jeff Immelt stated “Demand for our global Infrastructure business remained strong, but our financial services businesses were challenged by a slowing U.S. economy and difficult capital markets.”

So the announcement was negative, but also had some positive elements to it. Later in his announcement Immelt said “Infrastructure had a solid quarter, growing revenues 23% and earnings 17%, Oil & Gas, Energy, Transportation, and Aviation all generated double digit profit growth – with no signs of slowing. Infrastructure orders increased 12%, and we added more than $3 billion in backlog since last quarter.” So while GE had troubles in the domestic financial market, their exposure to the global markets is what has kept the company going. Immelt further commented “Our focus on globalization has helped to sustain the company during the US slowdown. Global revenues grew 22% with strength in virtually every business. Developing country growth was 38% and 14% in developed countries outside the US.” What we liked about the GE story was that it is showing that underneath the US economic slowdown, the rest of the world is generating very solid growth for GE’s earnings and revenues. This speaks well for our call for a further decoupling in the globe and a lesser role for the US in the global economy. Make no mistake, the US is still the main engine driving the global economy, but we are seeing more and more evidence that America’s role is shrinking.

In the long term, this slow evolving decoupling will be very bullish for precious metals and commodities. In fact, after we see the current consolidation in commodities, we expect them to rise strongly in the second half of the year.

Stock Market

Going back to our prediction in the 2008 Global Outlook Forecast, in that issue we said that “In April, we will get the quarterly reports from the financial sector and these reports will not be good. When these reports come out, we expect the S & P 500 retest its low of 1275 area - probably around mid April.”

“After the retest of those lows, we are looking for the markets to begin to work its way out of the negative sentiment and start to head higher. We are looking for the markets to move higher in the second half of the year - 6 – 8 months ahead of the economy recovering.”

In our March 19th Flash Report, we issued a “buy” signal for the equity markets. Our indicators are now signaling that the markets are looking to move lower, as our Global Outlook Forecast had predicted. The S&P 500 needed to push through the 1385 resistance level, but it did not. There is no clear indicator to this point as to where the market is going, but we are seeing indicators that the market is going to head lower before it makes its next big move up. In the short term we are expecting the market to bounce around for about the next 2 weeks, until about May 2nd, where we expect to see the S&P again test that 1385 resistance level. If it can break through that level – great, but if not, we are looking for a rather strong correction, perhaps taking the S&P all the way down to the 1185 level. We see this correction last about two months, ending somewhere around the first week in July.

If the above plays out as we have presented it, then we would be looking for the market bottom to be in the first week of July. We recently added the DIA and General Mills to our templates. We could well hit our Sell Stops should this scenario that we have presented come true. If not, then we will ride the uptrend. But at this point, we are looking for a correction of the S&P 500 to the 1185 level, and if that occurs, at this point we plan to be buying at that level.

The bottom line is that if the S&P can hold and push through the 1385 and break through the 1400 level, this would be very bullish, and we could expect a major bull run. But our indicators are pointing to an inability for the S&P to break through that 1400 level, meaning that we are expecting a fairly significant decline of about 15%, down to 1185.

Precious Metals

In that 2008 Global Outlook Forecast we said “Our prediction for the gold price by the end of 2008 is $1030.” We hit this target early, and then saw a correction back down to the $880 level. So where are we now with gold? At this point in time gold is in the middle of a consolidation. Remember that gold rose from $640 to $1034 since July – that is a rise of 61%. Then it dropped $150 down to $880, giving back 37% of that 61% gain. The big picture has not changed, meaning that as we predicted in the 2008 Global Outlook Forecast, gold should get to $1225 in 2009.


Gold is currently is a sideways oscillation, meaning that it could retest the highs of $1034, and it could also retest the lows of $880, or even go lower over the next couple of months. So while gold looks to gain 30% - 40% in the next 12 – 18 months, the current level is not likely to be the low in the next couple of months – there should be an even better opportunity coming up.

Silver

As good as gold sounds, we really like Silver as an investment. Silver has the potential to reach $40 by 2010. It has already had a dramatic climb from $4 in 2002, to its current level of over $17. As we can see on the chart below, silver is trading in a range between its previous major high of $15 back in 2006, and its most recent high of $21.50.

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About the Author

Martin Straith is the Editor of very successful investment newsletter called the TREND letter.

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