Back To 2007 Highs

April 18, 2007
By seadmin

We told you last week that earnings were going to be the key to the future direction of this market. So far, corporate earnings have come in better than expected. That news, along with some encouraging inflation data, has pushed the major averages to new highs for the year.

The Dow now is in record territory. It jumped higher on Monday and Tuesday, after a rise in home construction and news that consumer inflation remained tame. Wall Street seemed relieved by the Commerce Department’s report that housing starts for March actually rose 0.8%. The consensus opinion had been for housing starts to drop sharply.

The broader S&P 500 Index, shown in the chart below, has broken above its February highs. The index has recovered fully from its early March drubbing and it now is up about 3% year-to-date.

In the midst of these new highs, it is tempting to become excited about stocks and the market overall. But keep in mind that we still have a lot of concerns. First, there are potential financial troubles in the subprime lending sector that could spill over and further weaken an already languishing housing market.

We also have a slowing economy and the threat of inflation due to a spike in oil and gasoline costs. If we see a continuation of high energy prices throughout the summer months, we may start to see a major spillover in the cost of everything we buy. That increase in costs could further fuel the undercurrent of economic slowing, and that would mean a pullback in stocks.

I want all of my Alert readers to be cautiously optimistic going forward. The market has recovered nicely from the March sell-off, but we still have a lot of threats out there that could potentially knock us back down to those March lows.

If you are thinking about putting new money to work right now, make sure you put a stop loss on every position you enter. This market hopefully will keep rising and you won’t need to pull the trigger on that stop loss. If, however, the current rally loses its momentum, you’ll be prepared to protect yourself from any downside damage.

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