I apologize in advance for these comments. It is just me thinking out loud weighing the options and it may sound a lot like gibberish. I know, I know. How is that different from any other day, right?
The market had another good day Thursday, gains-wise, but the word on the street is that the lack of volume and conviction means we are due for another sell off.
That has some truth to it but we can look at it two ways. From the contrarian viewpoint, if everyone thinks we will get a sell off, it could mean we may not. If everyone who expect the sell off is already on the sidelines, who is left to sell? That is a bit simplified but it is the theory of contrarianism. It's the old "the market climbs a wall of worry", if you will.
On the other hand it could be a self fulfilling prophesy in that everyone will start to sell because they are expecting it to see it happen. This is what happens at resistance areas on a chart. The resistance area holds just because we reached it and everyone wants to be the first one out. Does that make sense?
The other problem is that it is the "smart money" I am hearing this sell off talk from, although the new AAII Investor Sentiment Survey again shows over 40% bears which is usually positive for the market. Last week when it was over 50% (for the first time in over a year), the market rallied. The herd is usually wrong in these spots. The herd is bearish and the smart money is anticipating another whooosh! If you look at this chart from early 2004 that I posted the other day, you see at points #1 and #3 we had sideways to upward movement off of an initial drop, only to get one more push down before the rally. The other day I was comparing the current situation to point #2 where that did not happen. I think we need to see a big 1% plus gain on high volume if #2 is going to be our guy.
Chart provided courtesy of www.decisionpoint.com
And then there's 1994. I keep showing this chart as it is quite similar to what we have been seeing so far this year, both technically (chart) and economically...
Chart provided courtesy of www.decisionpoint.com
If you put a piece of paper over the right part of that chart covering up the waterfall like decline, you see a chart that appears healthy and just rallying off of a common pullback. It took months for the market to recover those losses. Losses that are a possibility now, but also losses we may be able to avoid.
So you can see this may not be an easy call. I
think the best way to play may be to be to play it safe. If we
stay in and the market gives us that last push down but rebounds
quickly, no big deal. We are even. But if we can avoid a
nervous sell off we can hang on to the modest gains we made in the last
week or so and get back in at lower prices.
Just to confuse you me even more, here are some reasons why we may or
may not see this happen:
- The ARMs Index still has not seen the fear it usually does near a
bottom. Bad.
- The herd is bearish. Good.
- Volume has been very low on this short rally. Bad
- Oil is showing signs of wanting to come down. Good.
- The overbought indicator is creeping into the overbought zone.
Bad.
- April, particularly early April, is historically strong. Good.
- The smart money is getting nervous in the short term. Bad.
Another push down would hurt us in the short term but it would weed out
some of the "iffy" bulls and that would definitely have a positive
psychological effect on the market for the longer term, from a
contrarian viewpoint.
Here's my plan: If the market is up again Friday morning and it
is not a rally with some conviction, that is up near 1% with better than
average bottom, I will likely make a quick trade back into the G fund.
I will email you. If I do this it could be only a one or two day
move so consider whether something like this fits your style or plan
before following.
That's all for today. Currently 60% C, 40% S fund but this may
change Friday. Have a good weekend.
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