They Always Know More Than Me Or You

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"They" being the market. You or your broker or your friend has this great investment “guy” that can come up with a whole host of reasons why the market should zig or zag. When the market goes against us we scramble to come up with reasons why it shouldn’t be happening or why the market is “wrong”. But, if the market goes in our direction we are in a rush to tout our brilliance. Never do we think of the broken clock analogy and our investment outlook. Perhaps we should.

We all often feel the identification of a problem, or potential problem, is reason enough for the market to weaken. Remember, the market discounts all. The increased payroll tax is a good example of this. We all had a hit to our paychecks at the start of this year in the form of higher payroll taxes. Some have used this to say the consumer, and by extension the market, is dead. Well, if you or I identified something as a potential issue, don’t you think big money investors have recognized the issue also? Just because we identify things that we feel should be a drag on the market, it doesn’t mean the rest of the market is going to see things the same way.

How should we gauge the market's opinion of all the potential factors that are influencing prices? Perhaps we should look at price!!!! While that sounds simple, even fundamental, price is not a major consideration in most investors' thought process. The great Stan Weinstein started his weekend update this way: “There's an old saying on Wall Street that, 'the most bullish thing that the market can do is to go up.' Sounds simple but we oftentimes make things more difficult than they need to be. When the market is headed straight down all the potential catalysts are well known by all market participants. When the market is running higher there is no potential for the market to be missing something. All news is discounted by the market. So, instead of clinging to fundamentals, or "funnymentals", that we all use from time to time, consider incorporating the thing we all get paid on—price. Price is the great decider. If the market is going down then the negatives are viewed as more powerful than the potential positives. If the market is moving higher, and the market knows all, the weight of the evidence favors the positives.

So, take anything that you feel is negative and add it to the 54 links you clicked on this weekend that proclaimed we are all doomed and realize that the information you are clinging to is already known or is just nonsense that the market has already chewed up and spit out as drivel. No, the newsletter you received over the weekend does not contain shocking information that only “my paid subscribers” know about that will rock the markets. Nor does your mailbox contain the magic formula for turning $1000 into penny stock riches in short order.

Let’s look at the technicals of the market to see how all of the information is being viewed by the market. Also, as always, I’ll give you support levels that are being monitored by the market. If these levels hold, as they have every time the market has tested them this year, the market will continue on its merry way. If the major averages give way and selling picks up, there will be a shift in the consensus view of the condition of the market. The price level of the market will tell you when that shift has taken place, not your investment “guy”.

Support levels for the S&P 500/Dow/NASDAQ/Russell 2000 are: 1542/14,390/3220/940. I am starting out with the support levels in the technical portion this week because you need to know them and respect them. All the news about the last earnings season and the next earnings season (which starts next week) and the price of tea in China are reflected in price. If there are changes in the way the major averages act at support then market sentiment is changing and that will have a major impact on the market.

84% of stocks in the S&P 500 are in either basing or advancing chart patterns. 77% of small stocks are in those favorable categories. The second number is off the 2013 high. This is reflected in the fact that the Dow and the S&P 500 have moved to new highs and the smaller cap averages have not. Several measures of internal strength hit new 52-week highs last week. But, there was a slightly negative change at the margin. There are more names that are underperforming the broad market averages. This is a sign that the advance is not as broad based as it was a few weeks ago. But, when you take all things into consideration, there is more right than wrong with the technical picture of the market. Monitor the support levels I gave you and let the market tell you where it wants to go next, not some link that your bonehead brother-in-law sent you in an e-mail.

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About Thomas J Smith CFA