Even If A New Bull Market Has Started,
It Does Not Make Sense To Chase Stocks Now.
Retest of Lows Still Likely.
April 17, 2009
Many markets, including the NASDAQ, have made meaningful new highs, which may be indicative of a bottoming process. Below for planning purposes, we explore the possibility that a new bull market has started. We also illustrate that even if that is the case, it does not make sense to chase stocks from current levels. Stocks never go straight up or straight down. If we are patient, we will get a meaningful pullback in stocks. In 2002, investors had 97 calendar days to build positions after stocks made their initial surge off the bear market lows. Hopefully, we are seeing signs of a bottom in risk assets. This would be good news for all investors. However, we do not want to buy when others are pushing assets to overbought levels. We want to buy during a correction - when we are hearing things like, "the market may have gotten ahead of itself - we were due for a correction. We still have significant economic issues..., etc."
Yesterday's important closing high in the NASDAQ could spark some additional panic buying. Panic buying is almost always followed by some sharp corrections. If needed, we will get a chance to build positions at better risk/reward levels (assuming we can control our emotions and remain patient). Real bull markets last much longer than 5 weeks - they last years - we have not missed a bull market.
If we continue to see bullish signals, especially during a healthy and orderly correction, we are interested in possibly building positions in:
As of this writing, for numerous fundamental and technical reasons, we are most interested in oil.
We Do Not Need To Rush Back InAfter the last gasp of the giant rally off the lows in 2002, stocks declined for 97 calendar days. If we are patient, some type of correction will present buying opportunities. Corrections always come - always - stocks never go straight up. In fact the longer, the stronger, and steeper the rally, the higher the odds are for a sharp correction. It may not come for a while longer, but it will come. The markets have changed, economic conditions change, but human beings have not changed much - they continue to get too excited at times and then too pessimistic at times. The current optimism will not last without some periods of pessimism.
The chart below shows what happened before and after the important higher high was made by the NASDAQ in 2002 (a high similar to yesterday's new high in the NASDAQ). Notice in 2002, the 200-day moving average put the brakes on the rally that started from the bear market's lows. In 2009, the NASDAQ's 200-day moving average is also close by at 1,787 (6.8% above yesterday's close). We could see stocks push higher - maybe even in a "panic buy mode" sometime in the next week or so. Serious fundamental problems remain in our 2009 economy - at some point the market will question the sustainability of the current rally - it may happen between current levels and slightly above or below the 200-day moving average (1,787). We will just have to see how it plays out.
This old Bloomberg article sites research that found "retests of bear market lows occur 86% of the time", which clearly supports remaining patient.
Markets Take Similar Paths Because People Act In Similar WaysThe purpose of this analysis is not to suggest 2009 will follow the same path as 2002. The purpose is to better understand the basic human emotions of greed and fear. Overbought markets have to do one of two things to clear the overbought condition: (1) go down, or (2) go sideways. It will happen at some point.
As we mentioned on April 15, 2009 (Leading ETFs: What To Watch Now), may markets are extended and facing significant resistance. As stated earlier, we would not be surprised to see another round or two of "I can't take in any more, I am going to buy something" rallies. They could be sharp and may see rapid intraday reversals. There are human beings and a lot of moving parts behind these charts - anything can happen at any time. It pays to keep an open mind.
The charts and commentary above are for illustrative and educational purposes only and are not recommendations to buy or sell any security.
Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com
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