Key Technical Juncture - 1,000 DJIA Points Either Way

George Brooks |

Brooksie's Daily Stock Market blog  -  an edge before the open

Friday, August 26, 2011   9:16 am EDT

DJIA: 11,149.82         S&P 500: 1159.27

Yesterday’s sharp decline confirmed my suspicion – that the “double bottom” traced out by the
major market averages is suspect.

The “bottoming” pattern, was  sculpted by hopes that Fed Chair Bernanke would introduce  a  remedy for a slumping economy  in his speech at 10 o’clock today from the meeting of  central bankers at Jackson Hole, Wy.

At this point, it looks like the Street has second thoughts.

The “double bottom” needs a high-volume break above DJIA 11,500 (S&P 500:1210) to signal higher prices.

A break below  DJIA 10,748 (S&P 500: 1120) would put the August 9 to August 22 bottoming pattern at risk.

One of the biggest  drags on the economy is the low return on  safe investments, including money market funds and CDs is next to nothing (0.58 for a 6-month CD).  While safety in these volatile times is
directly related to a sound sleep, people are  not receiving any meaningful income from their cash reserves.  Unfortunately, low rates accompany low inflationary expectations and economic slumps and a Fed policy that is designed to prompt a  recovery.

It’s not a bad deal for the Treasury which recently sold $29 billion in 7-year notes at a record low yield of 1.58%.

Buy a  dividend paying stock ?

Yes, unless it is at risk of declining.  What good is a 5% dividend if the stock drops 8% - 12%, or more. Besides, the price of a stock is automatically reduced by the amount of the dividend when it goes x-dividend (when cash leaves the company en route to its stockholder recipient).

Essentially, the company is  transferring some of your investment to you and of course you’ll be taxed on it.

At times, this begs the question,  is the money better used by the company internally or disbursed as a dividend ?

On the bright side.  Dividend-paying stocks can suddenly become very attractive if a significant decline in the
overall market hammers these stocks, thus reducing their downside risk.  Timing becomes critical.

Low returns on “safe” investments can plague corporations, but possess benefits to the economy. An
estimated $1.9 trillion in cash is stashed in corporate coffers earning next to nothing. This stands to be an incentive for CEOs to buy back stock, invest in other company’s stocks, or invest in technology or plant and equipment.

One final point.  With interest rates at record lows, bond prices are at record highs. This makes long-term bonds risky in the event the economic slump lacks momentum, turns up and prompts inflation to do likewise.

Buying long-term bonds to achieve a better return at this juncture can result in a huge paper loss.

George Brooks

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The writer of Brooksie’s Daily Stock Market blog, George Brooks,  is not registered as an investment advisor.  Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk

 

 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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