December 3rd, 2008

A True Tug-of-War

I had an interesting conversation last night with an avid and favorite reader and informed trader, Ben, my son and a market junkie himself, about whether the market has bottomed and, if so, how to go about finding winning stocks. The conversation went something like this:

Ben: I think the market’s hit a bottom; how ’bout you?

Me: I don’t know, but I hope so.

Ben: When do you think the MTI will signal it’s safe to get back in the market?

Me:I wrote about that yesterday [see December 1, 2008]; it points to late January to early March … as a rising S&P 500 converges with its falling 180-day moving average.

Ben: Where will the Index then be?

Me: In the neighborhood of 1100.

Ben: But that’s around 30% higher than it is today?

Me: I know. That 30% represents insurance the move up wasn’t a suckers’ rally and the market has truly turned the corner.

Ben: I’m not sure traditional measurement tools work when the market declines so steeply so rapidly.

Me: Yeh, I agree, traditional charting doesn’t work in this sort of environment. Alternatively, the market could stay at current levels in a long basing process allowing the moving average to drop down and converge where the Index is today. But if the market remains flat at this 850 level, it would be early 2010 before that convergence and cross over takes place.

Ben: I’m not sure I want to pass up that 30% move, if it happens. I’m switching from a technical approach to – don’t get shocked – a more fundamental approach. I’m finding so many cheap stocks from a valuation perspective. Stocks selling for less than one-year’s annual sales, stocks with huge dividends and good balance sheets, stocks with large cash positions.

Me: I hear ya and have the same reservations … but it’s the best thing I have to go on. I’m going to let others, like you, find tomorrow’s movers and try to track and piggyback onto their trading activity. That’s why I’m putting traditional chart patterns (like inverse head-and-shoulder bottoms) temporarily on hold and focusing instead on things like “Golden Crosses”. Charts will come back after the market has moved into a new phase and a trend actually develops.

I thought I’d share this with you because, as you grapple with today’s volatility and lay out a strategy for the next couple of months, the conversation encapsulates the sort of things you’re seeing in the business media, the talks you’re probably having with others or having merely roll around in your own mind.

I’ll endorse all those who say this is the toughest market they’ve seen in their lifetime. (He writes as the market does an about-face and turns up 3.6% from a down open to 1% gain … crazy and confused market …. a true tug of war between the few buyers (bulls) and the remaining sellers (bears).

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