IT'S A NEW MARKET.

The Market Has Changed. For several weeks now, I have been saying that there is more upside potential in the stock market than downside risk. Now that the market has roared past the 8000 level that may be no longer true. If you will recall, when the market dropped to 6400 and reversed itself back to above 7000, I said that we now have weak support at 6400 and resistance at 8000. Once the market broke above 8000 and remained there for several weeks, 8000 again becomes a support level. This indicates there may be a potential for the market to reach 9000, the next resistance level.

How Valid is This Type of Analysis as a Predictive Tool. Perhaps the main reason for the validity of this analysis is that lots of trader/investors follow it. While I don't believe it is highly accurate, neither do I believe we can afford to ignore it. As I have said about other predictive tools, it is just another data point. What I have now concluded is that the market has reached a new level of stability. There is little reason to believe that fluctuations in the Dow of 500 points a day will return anytime soon. A strong indicator in this area is the VIX, a measure of implied volatility in the marketplace. This is also a measure of investor fear. Now that this indicator is in the low 30's, (As opposed to the 70's of a few months ago) it appears that fear has diminished to a large extent. The bottom line is that there may still be some more upside; however, the upside potential is no longer an order of magnitude higher than the downside risk. There are many hurdles in our economy and full recovery may be a considerable distance down the road. I believe a substantial recovery to prior levels will take several months, perhaps even years.

So Why Should We Be In The Market At All? Because there are few other places to invest. Bank CD's and long-term treasuries pay so little that those of us who need to support our retirement with our investment portfolio have little choice but to invest in the market. We can still get dividends that exceed those of fixed income investments from relatively stable companies like AT&T and Bristol Meyers. We can also speculate a bit in REITs and business development companies, some of which still pay dividends in excess of 8%.

What About Real Estate? There are a lot of reasons for housing prices to increase. Mortgage rates are still quite low, the government is giving $8,000 to first time buyers, and the affordability index is at all time lows. If those economists who predict that massive federal deficits will cause runaway inflation are correct, housing offers one of the best inflation hedges around. A word of caution: Don't expect this to be a passive investment. Even with a good management company like Westmont, there will be some hard decisions and difficult times in coping with with rent collections, maintenance, and vacancies. With all this, I believe real estate investment returns will exceed the stock market in coming years.

Coming Back To Denver At The End of May. I will be spending a couple of weeks in Denver at the end of May. Those I never got around to seeing on my last trip could call Susan (She always knows how to find me) to arrange an appointment.