November 23rd, 2010

Listen to One Opinion or the Sound of the Thundering Herd

Who am I to disagree with someone of such repute as John Murphy, chief technical analyst at … but I think I must. A Bloomberg article this morning entitled “S&P 500 Drop May Lead to Bigger Retreat, Murphy Says: Technical Analysis” reports

“The benchmark for U.S. equities yesterday fell to 1197.75, about 2 points …. and is approaching the support level for a third time since the end of August. The index broke below the average five times this year, four of which were followed by losses of at least 6.4 percent, according to Bloomberg data.

“That’s an important test that will help determine the market’s short-term direction,” John Murphy, chief technical analyst at, wrote in a note yesterday. “A decisive close below the 20-day line would signal a deeper correction” that could take it down to its 50-day average, recently at 1,164. That’s 2.8 percent below yesterday’s close.

Is this information an individual investor can use? For me, moves of that order of magnitude merely represent noise. I wouldn’t sell any stocks if I thought the market may decline 2.8%. Actually, a move of that size actually represents a buying opportunity if your long-term view is for a robust 2011, as mine is.

If fact, the balance of technical evidence is now weighing more on the side of a breakout on the upside from the 12-month trading range than there is of a new bear market. Here’s the chart I included in this weekend’s Weekly Recap Report (click on image to enlarge):

I’ve established a new near-term target of 1320 sometime before the beginning of the “sell-in-May” escape. The projection is based on what I perceive to be continually strengthening upside momentum as measured by my moving average based Market Timing Indicator. While Murphy is looking at 20- and 50-day moving averages, I’m focusing on the fact that the 100-dma is a day or so away from crossing back above the 200-dma.

It may sound insignificant but when that fact is combined with the facts that 1) the 50-dma long ago crossed above the 200-dma (the Golden Cross) and above the 100-dma, 2) each of the three are above the 300-dma, 3) all four moving averages are trending up and, finally, 4) the index itself remains above them all then, historically, this tends to be very bullish. Especially since the market is at the early stage of that alignment.

So who are you going to listen to, a single technician (even though he’s the chief technical analyst at a website that’s known for its charting) or the voices of millions of investors from around the world who have been throwing billions of dollars at an ever expanding range of stocks and continue to do so at ever greater pace? It’s not a question of being either an optimist or a pessimist. It’s not a question of being either having a short- or long-term time horizon. It’s about making money in the stock market and for that I think I’ll chase the herd.

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  • Anonymous

    still 1320?? $VIX spiked up today?

  • Joe

    We spend too much time and waste too much money reacting to daily news and indicators. Everything needs to be put into context and a longer term perspective.

  • Anonymous

    mind to share cash & sectors allocation (%)?

  • Joe

    The comment section doesn't lend itself to a table list but I'll summarize and hope it is legible:

    1) Tech (software, equipment and semiconductors) = 30.2%;
    2) ETFs (emerging markets and China, precious metals and financial) = 7.6%
    3) Retail = 7.6%
    4) Coal and industrial metals = 6.5%
    5) Auto Parts = 4.3%
    6) REITs = 4.3%
    7) Internet = 3.2%
    8) Oil & Gas = 3.2%
    9) Wireless Telecom = 3.2%
    10) 11 Other with less than 2.3% each = 19.4%
    11) Cash = 9.6%

  • Anonymous

    Hello Joe,,seems the talking heads are getting very bullish on natural gas stocks for 2011..I never make sector buys without checking your site first..Buy,Sell or Hold on natural gas ? Thanks for any info

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