August 7th, 2005

I’m looking out in the horizon

I’m looking out in the horizon, over the tree tops, at the Elizabeth Islands at the end of the first of three weeks on our vacation in Martha’s Vineyard. The weather has been great, my 11-week old granddaughter has joined us for a week (yes, her parents tagged along) and my other son came over last night for a couple of days. We’ve all said how great it would be if I (my adding under my breath “after cashing in some stock”) bought this place I rented. Life is good …..

Except for ending the week with an 9+ point declines in the SP500 on each of Thursday and Friday. But putting this disappointment into perspective, the 2-day, 1.5% decline represented the largest back-to-back declines since the 1.85% of June 23-24 and 1.46% of May 12-13. In other words, the market, as measured by the S&P500, has moved up fairly consistently to its current 1226 level since hitting a low of 1136 on April 20. In other words, there is nothing to indicate that the momentum has changed direction.

As one of my readers recently put it in a message to me,

“Sounds like an unconvincing rally. But since this is the middle of the summer doldrums with trading volume at its lowest point for the year isn’t this expected? If the market should hold on until Labor day in this trading range, then the big guys will come back from the Hamptons to rev up the market.”

Hamptons…Vineyard, what difference does it make. This is summer and everyone’s on vacation.

A rule we learned long ago is “never fight the market”. Somewhere around 40% of an individual stock’s movement is explained by the overall market movement, another 40% is explainable by industry group and only the remaining 20% is attributable to the individual stock. So, it’s important to reiterate that the stocks mentioned previously were approaching their resistance levels. A stock’s breaking through it’s resistance levels is controlled as much by the larger market trend and by the industry of which it’s a member.

Therefore, many of the stocks mentioned previously continue to each closer to their resistance levels but have yet to break through. They will begin to move through when the market continues to improve (most likely after Labor Day) and, conversely, a significant number of them moving through will indicate that significant gains in the market indices is imminent. Commitments to those stocks should be held up until the have completed successful breakthroughs (between 3-5% above the resistance level) and, conversely, the market launches a strong rally.

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