The comments below were provided by Kevin Lane of Fusion IQ.
On March 10 we said: “Market internals (i.e. the number of advancers to decliners and up volume to down volume) on today’s advance were the most bullish internal readings seen since the move off the 2002 lows … ”
We also said: “When the skew of advancers to decliners and up to down volume is this strong it suggests almost a buying panic on the part of institutions to get back into the market. Additionally these strong internals also suggest that there are a confidence and conviction on the part of institutional buyers.”
And last but not least, we said: “That said we believe today’s rally is the start of a good move higher (again it may not be the ultimate low – only hindsight will tell us that); however, the surge of momentum suggests this rally will be worth participating in.”
So here we are not many days later and up considerably from where we published those comments and now what?
We still believe the combination of the market getting really oversold, attractive valuations, excessive negative sentiment, portfolio managers having a lot of cash on hand and the quarter end for many mutual funds coming up (i.e. window-dressing time. After all if returns looked poor again more redemptions would follow) (and the last thing they want to show is down another 20+%)has led to a lot of capital redeployment. With the market moving higher quickly, even more managers felt they would lag behind their peers and subsequently benchmarks, thus even more money (i.e. managers chasing the move) came into the market.
In addition it was not unrealistic for many to think the stimulus package (no matter what your thoughts on its long-term ability to be effective or not) will goose the economy to some degree at some point in the not too distant future. So that said we continue to view this current rally as having legs with maybe another 10 to 15% up from present levels.(So buying on dips with appropriate stop losses would make sense for the time being.) We also continue to view this as an opportunity to make money on the long side for a narrow window of time (1 to 3 months).
However, ultimately we think this rally will fade and we will get a retest of the recent lows (check the history books, we almost always get a retest). How the market handles that retest will tell us a lot with regard to the longer-term picture. We believe tech and growth (since they have the best bases and most constructive chart patterns and corrected much less than the broader market during the down draft) will still outperform with regard to sector and style bias respectively during this rally/bounce.
In Barron’s this weekend, one portfolio manager, Felix Zulauf, made an articulate case that this will be a violent rally (900 on the S&P 500) followed by a move to new lows (450 on the S&P 500) with the ultimate bottom coming in 2011. This certainly is plausible, and would anyone doubt it after what we saw in the last 12 months especially if this is a multi-year secular bear? However, we believe the best one can get from this market is to try to dissect it and plan for shorter horizons such as 1 to 3 months until more macro-economic data allow for longer-term forecasting comfort. This is a market where traders will continue to dominate and thrive (provided you try to capture return both on rallies as well as declines). For the foreseeable future buy-and-hold strategies should be kept on the shelf if one wishes to make a return.
As always don’t BUY BLIND!! Have an exit strategy before you trade/invest (and stick to it)!!!
Source: Kevin Lane, Fusion IQ, March 18, 2009.
