Should you go with the mo?

You know, momentum. The tendency of stocks that have been going up to keep going up (until they don’t, of course.) It’s a successful investment strategy built on the observation that stocks are the only thing that people want to buy more of as they get more expensive.

From the October 3 low through October 27, the Standard & Poor’s Stock Index was up almost 17%%. That’s enough to put thoughts of 2009 in anyone’s head. From the March low that year the S&P 500 rocketed ahead 13% in just about two weeks—and from there it had almost another 1,000 points to go before it topped out in April 28, 2011.

On the other hand, going with the Moe is one thing but nobody wants to be Curley or Shemp. The rally from the August 19 bottom to the August 30 high took the S&P 500 up 10%–but it wasn’t followed by another two years of roaring rally. Instead stocks reversed and by October 3 they had tumbled to a level below where they were on August 19. If you’d bought on August 30 after that 10% move upwards, you would have been left looking at a 9% loss by October 3.

So should you go with the mo? Should you hold positions that have rallied almost 17% or more in a little more than three weeks because momentum will take them higher? Should you buy in now if you’ve been sitting on the sidelines because you don’t want to miss out? Should you be taking profits and trimming positions to protect your gains from a potential downturn?

I’d love to be able to offer you some magic formula—“The inverse Mondavi function says this rally is going to 1364.3 on November 8—or astounding piece of fundamental wisdom—Comparing the multiples of the current market to all markets stretching back to 1843, shows that stocks will climb another 17%.

But I think the current market is best described as poised. The news flow can break either way, depending on what “solution” comes out of Europe in the next two weeks (when we have all the details we don’t have today.) Fundamentals can go either way with growth in Europe certain to slow but growth in the U.S. and Chinese economies set to come in either above or below the expectations built into stock prices right now. Technically, the charts show a market that may have broken through some tough ceiling levels where it’s still too soon to say if the trend will push through that resistance or falter and fall back from yesterday’s levels.

So what’s an investor to do? Read more

New fear on old news is driving today’s drop

So what’s new this morning? What’s new today that has ratcheted fear up another level?

The Standard & Poor’s 500 stock index is down another 2.78% as of 11:30 a.m New York time this morning. That, on top of the 2.9% drop yesterday, brings the four-day pummeling to 6.5%. The MSCI All-Country World Index has moved into bear territory—it’s now down 22% from the May peak.

Most of what is moving the market this morning—and the day before and the day before that—is actually new fear on old news.

Yes, in yesterday’s announcement the Federal Reserve’s Open Market Committee stressed that it saw “significant downside risk” in the U.S. economy. But, gosh, didn’t we know that?

Three Italian banks were downgraded by S&P today. Following on the downgrade of all of Italy on Tuesday, this is surprising?

Yesterday Moody’s, which is playing a competitive game of “Can you match my downgrades?” with S&P cut the ratings on Bank of America (BAC), Citigroup (C), and Wells Fargo (WFC). Not good news, I grant you, but again nothing you didn’t know if you’ve been following the headlines of the bad mortgage problems at Bank of America and Wells Fargo and, well, we all know that Citigroup is still trying to unload the bad debt they piled into their bad bank structure.

On September 14 Moody’s downgraded two major French banks—pretty much what the company had promised in June when it placed Credit Agricole and Societe Generale on credit He watch.

At 1132 on the S&P 500 we’re again within striking range of the August low for the index at 1120. (I think this pretty much answer the question I posed a few days back of “Have we broken out of the market’s trading range?” The answer is as pretty resounding No.)

What worries me here is that we’ve got several days—the run up to the weekend’s meeting of the International Monetary Fund in Washington and then the weekend itself—of what is likely to be negative news flow. Read more

I don’t think stocks have broken their long-term upward trend but that’s a worry that means this market will take a while to base

You’ll be hearing a lot of talk over the next days and weeks from the technical analysts about the damage that’s been inflicted upon the condition of the markets. That’s one reason, they’ll say, that this market won’t bounce back immediately from its extremely oversold current condition and begin a new rally.

But what does that mean when you translate it?

Actually, it’s pretty straightforward. What the technicians are saying is that the market’s plunge has taken stocks down to levels that make it hard to tell whether this is a short-term correction in what is still a market that is trending upward in the longer term or if this drop has broken the longer-term upward trend and the market is about to drop further.

For a while it was possible to believe that this decline would take the Standard & Poor’s 500 back to its November 2010 lows near 1170. Read more

Apocalypse now?

I haven’t heard anyone breathe the phrase but we’ve come close this morning.

Here’s Mr. Bond, Pimco’s Bill Gross yesterday on Bloomberg TV: “We’re not looking at a recession yet, but we’re at a tipping point.”

And here’s Harvard’s Martin Feldstein, chairman of the Council of Economic Advisors to President Ronald Reagan: “This economy is really balanced on the edge. There’s now a 50% percent chance that we could slide into a new recession.”

I love the smell of fear in the morning. It usually signals that a buying opportunity is approaching.

Through yesterday the seven-day slide (continuing so far today) has wiped out the total year-to-date gain in the Standard & Poor’s 500 and erased $1.1 trillion in U.S. stock market value. Yesterday’s 2.6% drop in the S&P 500 is the biggest loss in a year, and this seven-day downturn is the longest losing streak since October 2008 in the depths of the global financial crisis.

Technical indicators are now reading “oversold” with many showing the most oversold reading since July 2010. The S&P 500 bottomed on July 1 at 1027 that year. The subsequent rally took the market to its April 27 peak of 1356 on the S&P 500 for a 32% gain.

The problem with oversold readings is that an oversold market can get even more oversold before it begins to rally. Read more

A very volatile but ultimately constructive day for U.S. stocks

Very interesting day in the stock market. And actually a positive one even though such major indexes as the Standard & Poor’s 500 finished in the red for the day.

Stocks opened down strongly in New York. At 10:51 a.m. New York time, the S&P 500 was down to 1262.87, which turned out to be the low of the day. That level represents key support for stocks at the June 15 low (1265), the 200-day moving average (1263), and the March 16 low of 1256.88.

If stocks had kept falling through those levels, it would be a sign that the body of investors didn’t think stocks were a reasonable buy, considering the risk, at that price. And we could have started to look for a further fall and support at a lower level.

But those levels held. The market did have another dip at 2:49 New York time to 1267.50, but stocks rallied strongly in the last hour to close at 1283. That was down just 3.6 points for the day.

An intraday reversal like this isn’t a guarantee of anything. The news tomorrow on some front—U.S. durables orders or the Greek debt crisis—could still be bad enough to take out support at 1257-1265.

But the fact that stocks were able to stage this kind of recovery after challenging support is a constructive sign.

Think of it this way: enough traders and investors were willing to buy at 1262.87 with all the news event risk that hangs over this market to make stocks reverse course in the later part of the day.

If we can just get a day when the news isn’t so relentlessly grim….