Stock Market Short-term Rally to be followed by New Bear Market Low

By: Christopher_Quigley

The American economy continues to contract. Construction levels are declining. Building permits, which are a gauge of future activity, fell to 786,000 in September from 857,000 in August. In September industrial production suffered its biggest decline since the recession of 1974-5. This broad based weakness suggests that the recession will be deep.

As mentioned last month we would like to see the Dow Industrial Index consolidate solidly at the 7500 range. The Bull/Bear battle continues to wage but if this level is grounded and tested over the next two to three months it would go a long way towards setting up the modalities required for a change in market psychology. While near we are not there yet. Volatility will continue.

In Europe the banking fallout continues to cause havoc throughout the Euro block, the emerging eastern markets and Russia. The fact that the European Commission's formula for putting together a pool of funds was rejected may indicate that the federal concept of the European Union may be well and truly dead in the water. What saved England, Germany and Ireland was intelligent and aggressive national action.

This indicates that international socialism has not yet totally replaced the Nation State as the model for economic success. Ideology does not pay bills, grounded value through work exchanged does . I would suggest that the new zeitgeist senses the weakness in the old global "conceptual" business model and smart people now know that national physical resources coupled with an educated and creative populace, producing real value is the way forward in an increasingly competitive world. The era of phony financial "wealth" is over. So too is the era of "Basel Leverage", as is the suicidal mentality that an economy paying 20 dollars an hour to its citizens should offer up its manifest destiny to a centralist "society" paying 20 cents an hour.

Once the reality sinks in that the true backing for the American dollar is the American people, their creativity, their work ethic and resources and brilliance in devising methods of exchange, then the political landscape moving forward will alter. With growing foreign political instability repatriation of funds will become a massive wave, with the American dollar benefiting. Protectionism is going to grow with a possible collapse of the Chinese economy a distinct possibility. The Wal-Mart model of doing business is going to come under pressure. The American people are finding new voice and voting with their dollars every day, as propounded by E.C. Riegel, rather than relying on the power of a vote every four years.

With the Presidential elections in the mix I would suggest that you have your powder available and ready for use. The market is so oversold that even if the bear is still vigorous there should be good market reaction to allow bulls to benefit. Again to reiterate the point if the market does not respond favourable after November, and breaks below the 7500 level, the 2009 recession will not have been properly priced into the market. A technical breakdown at this price point, which I think is probable, could bring the Dow Industrials down substantially further. Under such a juncture the Dow level of 1987 will be the next technical support target and this consciousness will place the market in the 6500 ball park area. Such a view works well with the fundamental fact that PE ratios are currently far too high for a protracted recessionary environment, even with the juiced inflation numbers which distorts sales numbers higher, but only nominally. Reality is beginning to bite which means folk are beginning to see through the hype.

However there is one issue which could completely alter the market reality. If the new administration successfully motivates the S.E.C. to regulate naked short selling, and review off-shore hedge fund activity, the true bear pressure caused to the market by this negative phenomenon may be finally released.

Monthly Stock Pick

Potash Corp. NYSE- POT 

Timelines: 2

PE: 5.7

Growth: 49%

ROI: 21%

Financials: A+

Potash Corporation of Saskatchewan is one of the world's largest integrated fertilizer companies, producing potash, nitrogen and phosphate products.

Potash Corp.'s share price has declined almost 60% since July. This harsh pullback is due to the sharp decline in the price for most staple food products, in particular grains. This, combined with a slowing global economy, has tempered investor sentiment.

However, despite this macro situation earnings continue to grow. New fertilizer contracts, signed last year, locked in higher prices for the first half of 2008. This momentum should continue and accordingly management have raised earnings guidance. Market dynamics should continue to favour the business through 2009.

Due to the bearish nature the board of the company have agreed to a substantial share buy-back programme. As a result, the integrated fertilizer producer will acquire nearly 32 million outstanding shares by next year.

All in all with market recovery this equity is a classic "value play" and offers considerable appreciation potential going forward.

Please study our risk management "trading rules" and disclaimer prior to taking any investment action.

By Christopher M. Quigley
B.Sc., M.M.I.I. Grad., M.A.
http://www.wealthbuilder.ie

Mr. Quigley is 46 years of age and holds a Batchelor Degree in Management from Trinity College/College of Commerce, Dublin and is a graduate of the Marketing Institute of Ireland. He commenced investing in the Stock Market in San Francisco, California where he lived for 6 years. Now based in Dublin, Mr. Quigley actively trades utilising the principles set out in the modules above. This Wealthbuilder course has been developed over the last 9 years as a result of research, study, experience and successful application.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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