PEACHTREE CITY, GA--(Marketwire - April 15, 2009) - Investors should act like traders and be
ready to take profit from the current market rally, a trading expert says.
"The current rally is a trader's rally, not an investor's rally,"
says
Wayne McDonell, a registered Commodities Trading Advisor, Chief
Currency Coach of FX Bootcamp (
www.fxbootcamp.com), a live forex training
organization, and author of
"The FX Bootcamp Guide to Strategic and
Tactical Forex Trading" (Wiley Trading, September 2008).
"Key economic indicators show that the economy is improving but isn't
yet healthy enough to support a sustained rally," Mr. McDonell says.
"There is still too much volatility, interest rates are distorted by
government intervention in the bond market, and unemployment will get worse
before it gets better."
"There's enthusiasm that the Treasury finally has a plan for toxic assets,
and there's a lot of hope that it'll work," Mr. McDonell says. "However,
traders have come in with too much exuberance, and the economic data, while
improved, can't yet support current market valuations," Mr. McDonell says.
Traders take short-term positions and try to profit quickly on market
moves. They accept high risk for high rewards; however, they are not
making a long term investment. When traders have an opportunity to take
profit, they will and the market will recede. Mutual funds, by contrast,
are conservative "buy and hold" investments -- investors take long-term
positions and seek growth as a stock price rises over time, as well as
income in the form of dividends. They are risk averse. The funds will
want to give the economy more time to heal before making such investments
and they will wait for more solid economic data and a market environment
that is less hopeful and more rational.
According to Mr. McDonell, in the near term the stock market will drift,
and then slide as we near the summer season. Traders will take profit and
trading volume will wane. "Overall the economy can't support the Dow at
8000, and a slow fall to 7000 is likely by late July. Investors should act
like traders and be prepared to take profit now. They should not count on
a sustained long-term market rally until late summer, when economic
conditions, confirmed by a trend of solid economic data, will begin to
improve.
"When the Dow is at 7000, volatility is lower, volume starts to pick up
again, it will be a sign that mutual fund money is starting to enter the
stock market and that the long-term rally has started," Mr. McDonell says.
According to Mr. McDonell, key economic indicators show the economy is
improving, but still has a long way to go before it stabilizes:
- The Volatility Index (VIX), which measures investor optimism
based on S&P 500 options, has improved since January but does not yet show
that the market is stable. "The VIX is below 40, which is a big
improvement from the worst of the crisis, when it was 80 -- but it needs to
improve more. We need to see VIX in the 20s and that will show that
there's not a lot of fear left and investors are prepared to invest for the
long haul."
- The TED Spread, which shows the difference between interbank
interest rates (LIBOR) and the 3-month Treasury note, is still at a full
percentage point. "It needs to come down by another 50 percent, which
would put it back in its normal range. For the spread to narrow, the
credit market must free up and banks must start lending again. When they
do, businesses and consumers will be able to borrow and spend, thus
supporting a long-term recovery in the market. More notably, businesses
can hire and expand, thus reversing the rise in the unemployment
rate."
- The Yield Curve, which shows the interest that investors can
expect from Treasuries over time, is currently distorted because of the
Federal Reserve's heavy purchasing of 10-year T-notes. "The Fed is buying
T-notes to keep mortgage rates low and support the recovery of the real
estate sector. When the Fed stops propping up the market, prices on
T-notes will fall, interest rates will rise to normal levels, and the Yield
Curve will return to a normal shape with short-term rates near zero and
long-term rates (for example on the 30-year bond) higher than the rate of
inflation. The Fed's exit will produce a crash in Treasury prices which
will push conservative safe heaven investors back into the stock market in
search of higher returns."
- The unemployment rate is high and recent Non-Farm Payroll
reports show continued heavy job losses. "Job loss has been much deeper in
this recession than in previous recessions, and it has happened faster than
ever. Job loss will be high for several more months. Unemployment is a
lagging indicator -- to shed jobs is a long-term decision, and businesses
won't start restoring jobs until they're convinced the long-term outlook is
good, businesses/consumers increase spending, factory orders improve and
the economy expands. Job loss stabilization and the beginning of
unemployment decline will be a sign that businesses expect not just recover
but actually turn a profit. For that to happen, business needs to see six
months of reasonable economic data. Even with this 1500 point rally in the
DOW, the real economy is less confident and 'Cash is King.' Businesses and
consumers are saving, not spending."
"When jobs stabilize, the 'fourth leg' of the recovery will be in place,"
Mr. McDonell says. "The four legs are job growth, healthy credit markets,
reduced volatility and rewards for long-term investors. When those come
together, probably in late summer, the long-term recovery will start and
there will be a real market rally. Long-term investors, such as mutual
funds, will come back into stocks. When that happens, investors can
abandon their short-term trading stance and can invest for the long term
again."
Wayne McDonell is available for interviews. For more information, or to
schedule an interview, please contact Itay Engelman of Sommerfield
Communications at (212) 255-8386 or itay@sommerfield.com.
About Wayne McDonell
Wayne McDonell is the Chief Currency Coach of FX Bootcamp, a live forex
training organization, which has an audience comprised of members from over
50 countries. He is also the author of
"The FX Bootcamp Guide to
Strategic and Tactical Forex Trading" (Wiley Trading, September 2008),
a top seller in the Foreign Exchange category. Mr. McDonell is a regular
speaker at major investing conferences, including the upcoming
International Traders Expo in Los Angeles. He provides his weekly trading
outlook on FOREX Television and his training videos are syndicated around
the world on outlets including FXstreet.com, MoneyShow, DailyFX, Yahoo!
Finance, MSN and others. He writes a monthly forex column for Your Trading
Edge magazine and has contributed "how to" trading articles to the FOREX
Journal, Traders Journal, Currency Trader and Futures Magazine. As a
professional forex trader, Mr. McDonell is a member of the National Futures
Association and a registered Commodities Trading Advisor.
Contact Information: Contact:
Itay Engelman
Sommerfield Communications
(212) 255-8386
itay@sommerfield.com