Financial Watch

To some investors Monday presented a great opportunity to pick up stocks following a steep sell-off last week. That is why we saw a decent rally yesterday. Early today more bargain hunters started to pick up stocks. Late in the day, we had another sell-off. Both groups were burnt badly this afternoon. For investors still looking to pick up more stocks at bargain prices, Financial Watch has one recommendation for you – wait. Fundamentals do not matter at this moment. Everything is going lower.

To the growing number of bears calling for a pullback the saying sell in May and go away has been taken to heart. Today we learned short interest hit a level not seen in more than 70 years. In examining the fundamentals of the market it is clear barring some unseen event we are moving much higher. To many out there the greatest risks are that either inflation will elevate beyond comfortable levels or the Chinese stock market bubble will melt down. Financial Watch discounts these risks as being greatly overblown. First of all the bull market we’re having in commodities will level out to more sustainable gains in the second half of the year. Most of these gains seen so far this year are in the volatile food and energy groups. The second major risk out there is a severe correction in Chinese stocks. In taking a cue from Alan Greenspan’s famous 1996 irrational exuberance speech, we believe he is just as early in calling a top in Chinese stocks. With the Olympics coming up next year the most we’ll see this year is a correction similar to the one we say earlier this year.

Based on our forecast for the stock market to move much higher in the second half of this year, today’s sell-off is a great opportunity for anyone with cash to move into the markets aggressively. Today’s contraction was based on a better than expected housing number that prompted bears to argue that a Fed rate cut was off of the table. As of right now the futures are projecting a less than 50% chance for a rate cut this year. Whether market participants see a rate cut coming this year or not, the market has significant upside.

Last month we warned our viewers about problems in the subprime sector spreading into the stock market. Only a week after putting out our warning, stocks had their biggest one-day loss in several years. Brokerage stocks were particularly hit hard by the sell off. Goldman Sachs, Bear Stearns, and Lehman Brothers are all down 10% from their highs earlier this year. This coming week will give us a great glimpse into whether blow ups in the subprime industry are impacting profits at Wall Street firms. Bears will try to bounce on any small opening into mortgage troubles hurting profits.

It is important to remember back a few weeks ago how poor things looked on the horizon in the stock market. Only a month later we are at record highs for the Dow and even more importantly approaching an all-time high for the S&P 500. It has been a long time coming, but we’re finally at the critical moment that propels the averages to unthinkable levels. It should be no surprise to our readers that Financial Watch is once again proclaiming that the Dow will surpass 20,000 this economic cycle. Many believe the market is only capable of moving up 10% per year. Ridiculously low expectations are a key ingredient as to why we believe the first truly global expansion is going to force investors to significantly revise upward what the markets are capable of. As important as it is to believe that the economy is never what it seems on Wall Street it is also necessary to remember what can happen during bull markets.

It is only a matter of time before troubles occurring in the subprime mortgage market spill over into the stock market. Most economists believe more than $1 billion worth of adjustable mortgages are scheduled to reset higher this coming year. In the early parts of 2007 we are already seeing the impact of so called exploding arms in the housing market. Foreclosures rates are skyrocketing higher as homeowners have been unable to keep up with their mortgages. At the present time foreclosure rates are still running in the upper range of historical averages, but should more significantly higher in coming months. Banks profiting from risky lending in recent years are rewriting lending standards to push out marginal buyers and selling off risky loans to anyone willing to buy them.