July 27th, 2009

Moving from Relief to Optimism

I’ll bet many of you thought I’d abandoned you. Rest assured, I haven’t. I’ve just been taking stock (no pun intended), trying to figure out what to do next. It’s not that there isn’t a game plan because I laid that out last week in “Campaign for your Economic Mind“. It’s not that I can’t find stocks with great charts to buy because, truly, there are just too many to take advantage of (see “Stock Picking Now Feels Like Shooting Fish in a Barrel“).

The problem is that I’m torn between, on the one hand, confidence knowing that a “traders’ remorse” correction, minor as it may be, is coming and, on the other, not wanting to miss out on the stampede into stocks I’m also sure will be coming as the leaves turn and begin to fall.

So one thing I do at times like these is to look backwards. For example, I looked at all the recommendations made here since May 1 to see if my rambling has benefited you:

I’m relieved to say that 7 of the 11 sets of recommendations outperformed the S&P 500 over the same period, some by huge margins. Some of the more recent stock suggestions haven’t yet had a chance to perform so I discount any shortfalls (A complete list of individual stocks is available by clicking here).

The past is interesting but the future is important (that’s not copyrighted so you can use it in anyway you like). Individual stocks continue to perform fabulously. As of today, nearly 3200, or 60%, of stocks have formed “golden crosses” – remember when, just a few weeks ago, we were looking forward to seeing barely 20%? A couple of weeks ago there were less than 50 stocks making new highs, today there were three times that number. If you’re a Dow Theorist, you should be pleased by the Transportation Index last week confirming the Industrials’ move (see “Transportation Stocks Might Soon Be Confirming Dow Theory“).

Finally, the Coppock Curve and Mean Reversion benchmarks have both been confirmed. As a matter of fact, on May 1 in “Measuring Market’s Health: Moving Averages, Coppock Curve, Mean Reversion” I included the following table:

Note how closely that projection has actually turned out to be – the S&P closed today at 982 vs. the projected July close of 978!. I ended that post with:

“So while we’re holding our breath that all these signals ultimately follow through with a promise similar to past experience, it could also mean that we’re not going to see the all time highs of 1500+ for some time. If the market follows the track of the 1974-75 Bear Market, the highest we might see the market by Year-End 2009 is 1050-1075 and 1250-1275 by Year-End 2010.”

The market has only one last hurdle to cross and that’s the 300-day moving average, at 1003, a mere 2.12% away from today’s close. The level also marks the point above the current neckline as the point where “traders’ remorse” set in above the 2003 recovery neckline.

Remember the following schematic from May 29th’s “From Shoulder to Bump, Hopefully” depicting the various emotional stages a stock market:

Back then I thought we were then going from Hope to Relief. When the upcoming “traders’ remorse” correction starts winding down, market sentiment will be moving from Relieve to Optimism; the market life cycle will transition from Accumulation to Mark-up. You can almost begin to hear the siren call of the talking heads calling you to their favorite hot sector or stock (Cramer even sounded off tonight about what sounded like the second coming of the 1990’s tech bubble).

So as we approach the true end of this long bottoming process, you’ll also begin to see some changes in the tone here. We’ll be looking for signs of the next major consolidation level (perhaps around 1250-1300, or whoping 35% over the neckline, sometime mid- or end of 2010). We’ll look for the Industry Groups that are on the verge of outperforming the market (currently Money Center Banks, Oil & Gas and International Markets but constantly changing as big money rotates among groups) and we’ll continue looking stocks with great charts and/or making new highs.

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