Tags: plunge | market | stock | fall

Where's the Plunge? Waiting for the Next Big Fall

By    |   Monday, 02 April 2012 02:09 PM EDT

Up and up it goes, where it stops, nobody knows.

The economy is still fraught with problems. It's undergoing the longest period of sustained high unemployment since the Great Recession. This is also one of the weakest recoveries on record, averaging GDP growth of just 2.5 percent in the ten quarters since the recession.

But the market is partying like its 1999. In just the last six months since early October the S&P 500 has soared an astounding 32 percent. In the first quarter of 2012, the index was up 12 percent, the best first quarter performance since 1998.

Editor's Note:Did Obama Betray America? Video Reveals Truth

That said, the market has risen on relatively thin volume. Many investors have been sitting out this rally on the sidelines. Individual investors I speak with are still spooked by the recent memory of the financial crisis and seem to believe that this rapidly rising market is just setting up for a fall.

Are they right?

History is not on their side. Going back to the 1950s, in the 13 first quarters when the S&P has risen 8 percent or more, the market was in positive territory for the next nine months in 12 of those years.

In addition, there are some good reasons for the market to go higher.

Corporate earnings continue to be strong. Valuations in terms of price earnings ratios for the market index are still below the historical average.

But the overriding reason for the strong market is the Fed.

By keeping interest rates near zero, money has no place else to go to earn a decent return. The Fed is in affect forcing money into the equity market. The 10-year Treasury bond pays 2.193 percent and a two-year CD pays a measly 0.9 percent.

The Fed has been able to successfully direct the flow of capital into the market. It's like water. If you damn all the streams and rivers that spawn from a large body of water except one, the water flow to the one outlet will naturally be far greater.

Editor's Note:Did Obama Betray America? Video Reveals Truth

Ultimately, the Fed's policies will likely cause a bubble and inflation. But for the time being, the market should continue to benefit in the absence of a crisis.

However, there are a number of possible crisis incubating right now. The situation with Iran doesn't appear to be getting any better. Should Israel attack Iran, or if the U.S. gets involved in any sort of military activity, oil prices could soar and the stock market could tank.

As well, Europe still isn't out of the woods. While it seems that a financial crisis has been averted in the short term, things could still unravel. Even if no crisis hits, markets never go straight up. Even the best years in the market experience periodic selloffs.

A sensible thing to do at this point is to ride this market higher but be cautious. A great way to exercise caution is to keep mostly invested in the market but raise some cash.

Don’t be afraid to take profits in positions that have gotten overly pricey by historical standards.

Make sure you have cash available to take advantage of a market plunge by scooping up well scouted securities at cheaper prices.

The market may have a day of reckoning, just not yet. It always pays to be prepared.

About the Author: Tom Hutchinson

Tom Hutchinson is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of The High Income Factor. Discover more by Clicking Here Now.

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Monday, 02 April 2012 02:09 PM
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