Now we test this rally.
The upward move in the market stalled yesterday, July 28, at technical resistance for the NASDAQ Composite index, which had led the advance.
Nothing unexpected there. The NASDAQ Composite is up 10% in just 18 days. That’s enough to convince some investors to take profits. A technical analyst would call the market “overbought.”
It’s what happens from here that counts, that determines whether we’ve had a great bounce, a very quick but decent summer rally, or are on the verge of something more.
What makes deciding how this market will break now so hard is that stocks have been so volatile recently. Arthur Hill of Stockcharts.com counts six moves in the NASDAQ Composite and NYSE Index of 8% or more since the April high. (That’s three moves of 8% or more up and three down.) That’s an average of one 8% move every 2.66 weeks.
Semiconductor stocks, which have helped lead the most recent upward move, show the same volatility (and then some) with six 10% moves since late April.
On that pattern investors can expect that any pullback here would be quick and substantial. (Like 8% or more, perhaps.)
The NASDAQ Composite hit a closing high of 2296 on July 26. Support from the mid-July low is at 2150. That’s about 6.4% below the July 26 high. If the market doesn’t get down to this level, but instead starts to move up after hitting 2200-2250, according to Hill, the action would argue in favor of a further advance.
semievolved
amen…my bs detectors have been flashing red on ed for a while esp since he seems to have an awful lot of time to post on here for a guy who must be be making millions. His “analysis” probably sounds good to a layman but a lot of it is just nonsense.
I have read Jim’s posts for years mostly to get an idea or two and he has been one of the better guys out there. I’m sad to see him go the paid subscription/mutual fund route because it pretty much guarantees his performance will deteriorate due to the pressures of keeping the quarterlies looking good. Can’t blame him though since a guy has to make a buck!
Think for yourselves folks! The little guy actually has an advantage if he does that. It also helps to remember that what motivates analysts at wall street firms (and obsessive bloggers) is quite different from what makes investors money. In fact I have actually begun to think a “conviction sell” by Goldman Sachs is actually a buy signal!! lol
ryanpatrik
right on! in fact, when i see that ed is now bullish it gave me pause about the ongoing rally. i have asked him in previous comments to post his buys/sells before rather than after they are made to give some measure of accountability. maybe he provides real-time info on his own blog. on this one, over the past few months he has been incredibly bullish on gold whenit was at 1260 and it has since fallen 10% (i’m sure he meant long term…) and has continued to indicate the market is headed for the basement (and he said all he owned was short positions) while the recent rally has unfolded (it may still fall but there has been a heckuva nice upswing). i questioned him on that as well and he responded that he had closed the shorts with profit of course. great timing! i guess it will take people losing some $$ by following his astute calls before they get the picture.
jim is great – he doesn’t always get the timing right (who does?) but his picks are always posted ahead of time so credibility is demonstrable.
“Sitting on the sidelines” – is real — money in funds that is invested in cash or in bonds – long-term treasuries have continued to have solid returns this year, as last – may move from those assets to stocks causing more demand and driving prices higher. What’s the point of the discussion?
Ed – you’ve always been “shameless”…
EdMcGon……..consistency check please. Wasn’t it the same guy who was so bearish a short while ago and whose “savvy” balance sheet and tax analysis said Total was a poor bet? Some of you guys should be more careful where you get advice. Think for yourselves and don’t mistake dime store blog posts for good ideas. A lot of what I am reading on here sounds very “astute” but is actually nonsense when you really think about it.
It is impossible for money to be “on the sidelines” or “go into stocks”. Money moves through things. This is an accounting identity fact. It’s willingness to buy at a given price and not money coming into or out of that matters.
The Trim Tabs flow of funds idea accounts for monetary growth, stock issuance, IPO, buyback, merger, etc. But money is not “on the sidelines” as there is always a seller for every buyer. “Money on the sidelines” should be taken to mean the market is willing to buy lower coupon fixed, or take no risk at all, instead of wanting to bid up and pay more for stock. This means there is potential for sentiment shift–those animal spirits. It’s supply and demand with a little more detail.
Purewater,
If the seller decides to keep the money in cash, then you are correct. It would be a wash. If the market has more cash coming in than going out and it’s enough cash to overcome additional supply (i.e. IPO’s, secondary offers, etc.) then the market will rise. If more money is going out or to much supply is being added, then the market will go down. You mention sentiment, that’s the markets belief on average of what is going to happen in the near future. If my sentiment is the market’s going to go up and I have cash I buy more stock. If enough people agree with me the market will rise.
USDAportfolio,
I should clarify. I think we will see the markets peak in September or October, and possibly as late as November. But whatever you do, get out before December.
USDA/dmartin: The point is, there’s not more money on the sidelines that can be used to drive up the price of stocks. There can’t be, it doesn’t make any sense. Any stock you sold to build cash, someone else bought which reduced their cash. Sentiment can increase demand/price but not surplus cash.
another great blog to check out http://bit.ly/cVJs0m it’s not mine but great picks
Ed,
Great to see you have a blog. I’ll have to check your thoughts from time to time.
By the way, as you know, I agree with your thesis that good stocks will be worth more by year end.
Purewater,
Remember, a stock price is really just the constant interplay between a bid and an ask price, such as at an auction. Money moving from the “sidelines” is equivalent to more bidders coming to the auction, and bringing more money with them. The fact that there are more people with more money will inevitably drive up the prices.
when I sell a stock to take a profit, I usually don’t sell all of my stock. The person who buys my stock pays a higher price than I paid. Then I buy another stock that I think will do good and I pay higher than the person who sold it to me (lets hope ). so maybe that is how more money from the sidelines adds to the total market for the same amount of shares.
Purewater, you’re thinking too small. The market is never about one buy and one sell. It is driven just our cultures are (usually) by the majority, or the overall sentiment. It’s the total number of buyers vs the total number of sellers. The undecided sitting in cash (like me at 50%) will jump in when enough others head in one direction. Also, your one trade is not a total wash. One trade helps drive the market if you put your limit order in for more or less than the last price. Did you put your limit order to buy in for a few pennies more or less than the last sale. How bad do you want to buy that stock, before it goes up more or only if it comes down?
Ed, What difference would it make who you buy the stock from? Cash is cash. Money can’t “flood” into the stock market because that new money entering the stock market is selling a holding that needs to be bought by someone else. I think it’s sentiment that’s moves stock prices not supply and demand.
Basically, if you buy a stock from me, your money on the sideline just went down and mine went up. I think it’s a wash and of no consequence.
endorfb,
If you are asking about which sectors, I would recommend emerging markets first, and select U.S. stocks second.
If you are asking about specific stocks, here is my blog where I cover my own recommended stocks: http://edstalkingstock.wordpress.com/
Shameless self-promotion is not easy…
correction, I meant that the price is lower on the second peak not higher.
Technically the 12/26/9 MACD histogram shows that this third peak (7/27) is actually lower than the second peak on 7/15 even though the price is higher on the second peak. This shows that market is weakening. The last support that I see is around the 200d EMA which is at 2223.
I could see it closing below just to get the shorts in, then a day or two later, reverse the trend and the price jumps back above. The shorts will cover causing the price to move up faster.
Long term, I see the market beginning its downtrend in August with small upside corrections in Sept but overall downtrend until December.
All the high fliers this year are starting to fall. Look at NFLX. I shorted them at 120.
Ya, I know but what kind of stocks
endorfb,
I recommend you buy stocks now while they are still cheap. 😉
Purewater,
If the retail investor buys the stock from an institutional investor, it’s not a wash. Actually, the point of pulling the money off the sidelines is to create greater demand for stocks, thereby raising stock prices.
youonlygetone3,
Interest rates won’t go up until next year at the earliest, oil prices have been stagnant for months (although their rise is always a risk), and unemployment will remain at current levels into next year (possibly longer). As for world events, we can’t afford them now. 😉
bcapshaw,
Shhh! If my dad finds out, he’ll kill me! 🙂
southof8,
I had my first child at 6, my second one at 8. I was advanced for my age. 😉
Rajih, now that is funny!!!
bcapshaw,
I love it! You were the first to make me laugh today.
southof8 ,
you completely missed the humor in bcapshaw’s post.
everyone knows that if ed is really a 12 year old , then he cannot comment on balance sheets like Ed does and also the kind of input and opinions Ed posts.
If he is really 12 year old and doing all this, he is the next Buffet or Lynch.
Ed can’t be 12. He’s got two kids. Do the math.
You guys do realize Ed is a 12 y/o boy whose dad set up with a play money account to teach him, right? I mean, you all know that, don’t you? No?
Ed –
I still think there’s more risk than opportunity to enter now. Interest rates (potential rise), oil prices (potential rise), unemployment (stagnant at this level or decreased but due to lower wage jobs), world events (take your pick) immediately come to mind. I think we’ll see another dip between now and year end.
Purewater – Basic supply and demand. Do more people want money in stocks or somewhere else? When the answer is stocks, stock price goes up.
Ed, How exactly does the money coming from the sideline advance stocks? If that money comes from the sideline to buy a stock, that means that the seller now has more cash…hence, the seller has simply replaced the buyer’s sideline cash. Isn’t it a wash?
What do you recomend Ed?
Never mind about the last part, I went 100% cash in late 2008 and then got back in 1 yr later, so I lied.
Already in 100%, I wellcome risk, though. Although thinly traded, TNH has done well for me of late. I don’t try any sort of technical charting or marketing timing though.
I expect a weak cyclical bull market heading into the Fall, with potential for a strong bull market if some of the money hops off the sidelines. The time to get in is now.