Double-Dip Recession a Fashionable Discussion Piece

To make money investing, you have to be ahead of the crowd…or at least looking for the story no one is telling.

That was a tough task this morning. Suddenly, discussing the unthinkable – a double-dip recession and a retest of the March 2009 lows – is in vogue. Even readers are bored with the end of the world as we have known it…

With good reason, we suppose. Stocks registered their worst quarter since everything hit the fan in Q4 2008. After hesitant trading most of yesterday, the major indexes went over a small cliff in the final half-hour as soon as the S&P hit 1,040… closing the day down 1%.

As we suggested yesterday, technical analysts believe this 1,040 figure is an important line in the sand.

“If the S&P falls below 1,040,” writes Dan Amoss, editor of Strategic Short Report, “then we’re likely to revisit the lows below 700. Who knows if this widely cited ‘if, then’ conditional probability is valid? We may find out soon enough. When universally accepted technical support levels are breached, we tend to see heavy bouts of ‘self-fulfilling prophecy’-based selling.

“Regardless of how the technical conditions play out, there’s still a big difference between current stock prices and the prices that most value investors are willing to pay to assume the risks of owning stocks. The word ‘risk’ is key. In periods of heightened economic and political risk, investors demand higher risk premiums to hold stocks.

“A simpler way of stating ‘higher risk premiums’ is ‘lower stock prices.’”

Ah, those pesky fundamentals.

Addison Wiggin
for The Daily Reckoning

The Daily Reckoning