Today's Market Observation  09.17.2009  Mon  Tue  Wed  Thu  Fri  Goldberg Archive

The Bull Gets the Benefit of the Doubt

BY MARTIN GOLDBERG, CMT | september 17, 2009

The stock market is going up. This is regardless of the crash that bottomed in early March of this year. For technicians, it doesnt matter what their long term perspective is because the appropriate technical strategy is simple - stay long. The picture may change over time, but in technical terms, there is no reason to sell or go short now and a lot of reasons to hold long positions. This is especially true of stocks that have lagged the general market, where catch up rallies have been especially dangerous for the bears and rewarding for the optimists. Typical of this performance is that of Amazon.com (AMZN). Here you can see the lagging relative performance of AMZN dating back to the beginning of the rally off of the March bottom. Any strategist considering the poor relative strength as a sign of weakness in Amazon got punished with a sharp and large rally in the stock over the last eight trading days. This is not an isolated incident. Such behavior is prevalent all over today's financial markets.

Strategically speaking, it is a time where optimism should accompany bullish action and skepticism should accompany any bearish action you may be seeing. This is very much apparent when looking at the charts of indices and individual issues. In short, for now it is best to put on your rose colored glasses. 

Consider the chart of the FTSE/Xinhua China 25 index as represented by its corresponding ETF. In the face of bullish market action in August, the FXI had a relatively sharp correction from over 43 to below 39. Yet anyone with the fundamental conviction to sell or go short as a result of this lagging market got punished with a two week rally back to its old high and beyond.

Of the 30 stocks which presently make up the Dow Jones Industrial Average there are but two (2) that are below their 50 day moving averages (Kraft, and Verizon), and two (2) that are below their 200 day moving averages (Wal-Mart and Exxon Mobil).

Of course as always, the technical picture could change at any time; but to suggest that THIS is the time would be purely a guess or a crapshoot. Any responsible technical analysis method requires confirmation of a new trend beginning, and such a new trend is not there at present and there are no signs.

In my view, a likely intermediate term scenario is that the market may soon advance in a parabolic manner - an advance at an accelerating rate - before it undergoes its first significant correction since March. The reason I see this as likely is the consistency and lack of any significant correction since the March bottom. Such a steady uptrend without a much-awaited-for correction is a perfect motivator for “panic buying”.

While a move higher is likely, today’s levels as an entry point to buy would only be relevant for adding to existing long positions.  

Buying anew is simply buying into a much overbought market. Some may reference the overly optimistic overtones of the market as being a contrary indicator and this may be true. But it is rarely a good idea to use sentiment as a precise timing tool. Optimistic markets can stay optimistic for a long time. Remember 2003 to 2007? We may be into a year to multi-year bull market.

Some who use fundamentals for trading may reference the poor economy with no concrete signs of a sustainable recovery as a reason to sell. They should consider that it was apparent to anyone who looked that the last bull market was based on an asset bubble in real estate that was unsustainable. It would be wise to look for the next asset bubble that will drive the next sustained bull market and consider that there is every reason to believe that this next bubble will be the stock market itself. Yes, we had a stock market bubble in the late 1990’s; but today on Wall Street, people have short memories.

There is nothing whatsoever in the charts to suggest that this will not happen. But for the moment, you cannot trade into that. You shouldn’t sell, and you shouldn’t buy except to buy more.

Today’s Market

The market finished little changed, a bit to the downside. But this should be viewed through rose colored glasses. Volume was high on the NYSE and more subdued in the Nasdaq. Trends could change of course, so it's best to not become complacent; but it is best to give the bull the benefit of the doubt.

Have a great evening.

Martin Goldberg

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