Wednesday, February 3, 2010

Who’s Afraid of a Sideways Market?

This is an excellent piece by Legg Mason on how to invest in a sideways market - a market that remains range bound, in which overall momentum play dissipates and better stock picking will distinguish winners from losers.
Had it not been for consistent government meddling, we would be quite bearish on the market right now. But we believe that even though catalysts to move the market substantially higher from here have reduced greatly (mainly Bernanke's Quantitative Easing which ends in March), the Fed and its cohorts will try their level best to keep the markets from trending down significantly. They most certainly do not want a repeat of 2H of 2008, when the nation's 401k plans suddenly hit bed rock.
Hence the plunge protection team will be out putting some sort of a floor at least for 2010. This being an election year along with the fact that the Government most likely views the stock market as a "National Security Interest" (as evidenced from their classification of AIG as such during the 2008 crisis), it is likely that they will try to maintain the facade of economic recovery by keeping the stock market from trending down substantially. That is unless there is some catastrophic event beyond the Fed's control, like an oil embargo due to a war with Iran and further escalation in tensions with China.
Point of View

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