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Friday, 19 October 2007

Don't Let Bad News Scare You Off Market

Donald H. Gold

When the stock market notched its most recent follow-through day, Aug. 29, many people simply didn't trust the message. Buy stocks? At a time like this?

But the market's message with that follow-through was clear. And investors must get past the headlines. Whether the world's woes are real or imagined, stocks often take off in what seems the worst of times.

Look back at Aug. 29. What was happening?

The market was still reeling from the subprime-mortgage fiasco. Some huge mortgage companies were either shutting their doors or coming close to it.

Shares of rock-solid investment bankers with exposure to that mess -- Goldman Sachs (NYSE:GS - News) and Bear Stearns (NYSE:BSC - News), for instance -- were getting hammered. No one knew how much the fallout would spread to the economy.

Iraq was still a mess. Politicians were falling over each other to propose timetables for U.S. troop withdrawals.

Iran is intent on building a nuclear program and seems delighted to thumb its nose to the West, especially the U.S.

Global warming, North Korea, Hamas, Hezbollah, George Steinbrenner.

The world often looks gloomy when the stock market bottoms.

The Aug. 15, 2006, market follow-through occurred amid hand-wringing about corporate earnings. But also that day, a tame inflation report raised hopes for an interest-rate cut.

The March 21 follow-through happened after a series of bad news on the housing market. But on that day, the Fed hinted that it would take a dovish stance on interest rates.

The Federal Reserve's moves, by the way, are important to watch.

While not every follow-through leads to a new uptrend, every bull phase has started with a follow-through.

Watch for this signal, which consists of a big gain in at least one major index sometime after the third day of a rally attempt.

Also important is to watch for high-rated stocks, with outstanding fundamentals, breaking out of bases. When leading stocks make such moves, it serves to confirm a new rally.

More importantly, realize the economy usually isn't as bad as the news outlets will tell you.

The jobless rate is under 5%. Incomes are rising, and the latest retail sales stat shows we are spending well. Interest rates are low and probably poised to go even lower.

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