Sunday, March 25, 2007

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.

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