The Market Can't Make Up Its Mind

OK, this week was down, and the weekly MACD indicator is still saying the trend is downward. I'm still hearing the market should be choppy for a while longer, and is likely to revisit the recent lows if not break them.

However, now we are entering a seasonally strong week and month, if historical norms are believed. After the recent selling, a short-term bounce seems likely.

Stocks with strong earnings should come out of this OK. In fact, Louis Navellier, who runs top-rated advisories such as the Blue Chip Growth newsletter, says that as far as his stocks are concerned, if you sold some, you should be fully invested by April 6, before the latest quarterly earnings reports start coming out in earnest.

For those who want to be more active, the market signals are pretty mixed, as they were last week. One possible approach is to buy strong stocks and simultaneously short weak stocks. There are many possible criteria (screens) for selecting each group. Lately I've been trying out the VectorVest service, and it looks pretty good. They have a number of different preselected screens.

Eventually the market will break out one way or the other, and establish a new definite trend. But that time is not yet, so position accordingly.

The Fed Juices the Market -- Which Way Now?

The stock market was juiced by optimistic interpretations of the Federal Reserve's statement last Wednesday. Many traders, having expecting further weakness, were forced to cover shorts as the buying accelerated.

The market is in a somewhat confused state. On the one hand, most of my sources are still expecting the indexes to retreat further before resuming their uptrend. On the other hand, one can't deny the upward momentum shown by the major indexes. In fact, normally you don't see more than about 68% retracement of a move if that move is going to continue, but the S&P 500 has now recovered about 76% of its decline from the 2/22 intraday high to the 3/14 intraday low. The weekly MACD is still saying sell, but its daily version (shorter term) is saying to buy.

So what to do with these mixed signals? My sources are similarly mixed, so I don't have too much concrete informatino to pass on. It's probably not a time to buy or sell strongly, unless you are following a system that has a history of giving good results. For now, a middle-of-the-road approach would probably be logical to match the market's middle-of-the-road action.

For some, middle-of-the-road could mean going to cash (or staying there). Longer-term the market still looks OK, so some buying of conservative stocks could fit. But you probably want to keep some cash because those same stocks could be cheaper soon.

Or try looking for stocks that have rebounded strongly from the recent weakness. Even though the market averages are still below their late-February levels, some stocks have surpassed those values and gone to new highs.

Generally the market needs to experience a little more "panic" than we've seen so far, before making a good bottom and resuming the uptrend. But as the old trader's saying goes, price is the final arbiter, and if you argue too much with it you'll go broke. One of my sources is saying they will buy if the market continues up significantly (but not while it just meanders up slightly like the last two days).

The MACD is a good indicator, but not perfect (nothing is). For one thing, it lags behind the price action, giving somewhat delayed signals. But it does catch up. If the market continues on an upward path, the weekly MACD will give a buy signal before too long. And I suspect you won't miss too much if you wait till that point before becoming fully invested.

Is It Safe To Buy Stocks Again?

Many market analysts study corporate profits, interest rates, the general economy -- these are called fundamental factors. Other analysts study stock price charts, their patterns, and various indicators calculated from market action -- these are called technical factors. For various reasons, technical factors can often tell you more about market conditions than fundamental factors, especially in the short term.

One good way to help you figure out what's going on in the market is a commonly used technical market indicator called the MACD (that stands for Moving Average Convergence-Divergence). It's not perfect (no indicator is), but if you plot it on a weekly chart, the overall state of the market becomes much more apparent.

You can do this on many free charting web sites; my favorite is JavaCharts from prophet.net. Here are the steps to follow:

1. On the JavaCharts web page, first enter the symbol to chart. For instance, on this site the S&P 500 index is $SPX.

2. The next pulldown list determines the kind of chart. The simplest option is to leave it as a line chart, which shows the closing price every period. You can experiment with the other styles to see the difference; for example, bar charts and candle charts show the opening price, high, low, and close for each period.

3. In the next pulldown list, choose the desired time duration for the entire chart; for instance, one year.

4. In the next pulldown list, choose the period for each data point. For this example we are using "W" which produces a Weekly chart; i.e., there is one point on the chart per week.

5. Right-click inside the chart and choose Studies -- Apply Studies. Click the pulldown list entitled "Select Studies" and choose "MACD (2 lines)". Then click Close.

6. You now see an area below the main chart, whose main feature is two lines. On mine, there's a solid blue line and a dotted red line. Now look at where the lines cross -- those are the signals. There are variations in how to use this indicator, but the simplest way is, when the main line crosses below the dotted line, sell. When the main line crosses above the dotted line, buy.

Notice this signal gave a sell signal in May 2006, soon after the market started on its steep drop into the summer. Then it gave a buy signal in early August, soon after the market launched a powerful rally that ultimately gained nearly 18% in 7 1/2 months.

Please note that even though this indicator is pretty good, these are not standalone buy/sell signals and should be considered in combination with other indicators and market conditions. Still, you could do a lot worse than making the MACD a major guideline. The longer chart periods, especially weekly and monthly, are more reliable than shorter ones like daily and intraday.

Note that the nature of the signal is reactive rather than predictive, so it would not have gotten you out before the recent drop. But it can help you recognize when the trend has changed and thereby help prevent further losses.

So what's it saying now? It went to a sell signal in late February (due to the recent plunge) and is still on its sell. So even though the market could rebound right away, the odds are against it. Bottom line, it's not yet safe to get back in the market.

This also agrees with other information I'm seeing that it's not yet time to buy. In fact, if you haven't sold already, you still have the opportunity to do so. Even though I don't think this will be a severe correction, you never know how far down it might go.

So now you have a tool which should make you a lot more comfortable about being in or out of the market. In general, signals using the weekly chart occur every few months. If you don't want to trade even that often, use a monthly chart (expanding the view to about 5 years or more, so you can see past signals better) instead of a weekly one. On the monthly chart, the MACD gave a buy signal for the S&P 500 back in May of 2003 and that buy is still in effect.

Markets Rebound, But Not Yet Out Of The Woods

The U.S. stock market was up this week, which indicates why I told you last week not to sell everything on Monday. Still, the information I'm getting says the odds favor another push down, to test and revisit the recent lows (and possibly lower) before we get a full recovery. The bounce might start failing this week, or a couple of weeks from now, but it likely will fail.

Last week I advised against short-term trading in general, but if you are uncomfortable with your level of investment then now you could sell some of your holdings (especially stocks that have not rebounded much). If you are building longer term investments, then the stocks you want are now on sale -- so start getting some of them. Some companies have already bounced back strongly, and those also should be on your shopping list.

When my sources indicate it's appropriate to be a more aggressive buyer, I'll pass the word along. In the meantime, keep some power dry.

The Market "Meltdown"

The stock market really got hit this week, losing essentially all its gains since Thanksgiving in a single day (Tuesday, February 27). In a way it seemed to come out of nowhere from a steady advance that started last summer, but actually we were long overdue for a decline of several percent.

All it needed was a trigger, and the trigger seemed to be some comments by former Federal Reserve chairman Alan Greenspan to the effect that the U.S. might enter a recession in 9 to 12 months. Hong Kong and China stocks plummeted, and the same effect traveled around the world throughout the trading day. This was promptly contradicted by the current chairman, Ben Bernanke, who said we were not headed for a recession, but the damage had already been done.

Who's right? The experts who seem most credible to me say no, we won't have a recession, but yes, we will have to go through a market correction -- not a crash. Companies are making good profits, and that after all is where rising stock prices ultimately come from.

This is scary, but if you are following good investing principles (including diversification, and that includes some bonds, which are going up) you should be OK. There is talk of a possible worldwide panic caused by forced selling of assets bought with borrowed money (especially borrowed Japanese Yen, due to their extremely low interest rates), but there's always some "doomsday scenario" to worry about and it's just the latest.

So is it time to buy, or to sell? Well, it's very unlikely that we're at the bottom. Estimates for this correction range from 2 weeks to 6 months, and from 5% to 17% down from the recent peak. Nobody really knows of course, but there definitely is damage in the market that will take some time to repair.

But dumping your investments first thing Monday morning is probably not the best thing to do either. First, if you sell, you have to know when to buy it back. Almost nobody can get this right! It's psychologically almost impossible to pull off. Second, we will probably have a bounce in the next few days, which will present a better selling opportunity. Third, there are tax implications in selling.

But you could trim some of your investments, particularly the ones that aren't acting well, and buy better ones later. (What kind? Everything I hear says buy large blue-chip growth stocks.) Selling little by little, and buying back little by little, is psychologically easier.

Instead of selling things, you could hedge by buying some of the inverse mutual funds or ETFs (exchange-traded funds) such as the ones sponsored by Rydex and ProShares. The inverse funds go up when the market goes down.

But again, don't go all out. Whenever you make a big buy or sell, that's when the market will reverse on you. Humans are psychologically programmed to do precisely the wrong thing; that's why profitable short-term trading is so extremely hard.