Quarterly Market Brief by Christopher M. Quigley, B.Sc., M.M.I.I., M.A., WealthBuilder.ie | March 27, 2009 Print For those wondering why the stock market has exploded they might be interested in studying the chart below. This sets out clearly the proposition that the market has a long term correlation to currency in circulation (CinC). With the "Quantative Easing" policy now firmly in place. It is quite possible that the "old heads" about the market know of this relationship. Thus regardless of fundamental issues they may sense the groundwork being laid for a technical recovery based on finance alone. Time will tell.
Chart of DJIA and Currency In Circulation
The rally that began recently was long overdue as Stochastic, MACD and McClennan indices were all screaming "oversold". It is far too early to ascertain whether this rally has legs. With the earnings season now upon us it will be telling to see whether this positive trend can be successfully tested. If such is the case it would indicate that Mister Market is trying to earnestly find a bear base to sustain a change in trend. However, classic Dow theory tells us that "a trend is in place until otherwise proven." Thus this "rally" is a bear-counter-trend-move and investors should treat it as such. Therefore my advice for the last quarter prevails; this is a traders market not one for investors.
THEREFORE: Stocks should be chosen for their technical positions; hard sell stops should be used; once in a profitable position remain in it by raising your stop, therefore protecting gains; once you are stopped out do not re-enter until there is a significant pull-back that is supported.
I would champion this attitude to the market because the main indices have shown particular technical weakness. For example, this quarter, while the Dow 20 Transports successfully tested and held above the 2001, 2002 and 2003 lows, the Dow 30 Industrials shot below the 2003 support level, reaching an intra-day low of 6469. In my opinion, once this rally starts being tested, there could be a great deal of "whipsaw carnage" until a solid technical platform is secured. This has not occurred yet.
Should a market base develop, one area I would suggest looking at is the large real estate management arena. This area will explode, in a moment's notice, once a shred of evidence filters through that "Quantative Easing" and the "Toxic Bank" initiatives are working. It has been a long wait. Do not let the pain of the last year dull your pocket-book to the reality that all bear markets eventually die. The end to this bear will start with a significant rally that will be tested and supported and held. We might just experience such an event over the coming earnings season. Be aware, be alert, be prepared.
I am not sure whether there will be a sustainable rally in REACX, but I think we could get a good pop in this MF for the next six months. I think there will be "evidence" that the government scams are working--for a while. I am going to play this as a volatile upside rocket in what I believe will be a major bear market rally. It shows some encouraging signs of establishing a bottom here.