STRATEGIES

Smart investors who took Tom Aspray's advice are now well positioned as stocks have started off the year with a bang. Tom sees more opportunities in the coming weeks, but stresses that buying the strongest stocks or ETFs at good levels will be the best recipe for success in 2013.

Stocks finished 2012 and started off the year on a very strong note, with the Spyder Trust (SPY) gaining over 4% and the Powershares QQQ Trust (QQQ) doing even better. Though the monthly jobs report was a bit weaker than expected, stocks were able to hold their gains into the close on Friday

Pessimism over the economy and the stock market was rampant in the second half of December, as evidence mounted that individuals were avoiding stocks. The technical picture was much different, and the new high in the NYSE Advance/Decline line suggested that “stocks could be the best Christmas gift this year.”

Since the first wave of cliff-related selling reached its peak in mid-November, the technical evidence indicated that the market was just correcting and not forming a major top. The skepticism was easy to understand: the dysfunctional action in the House of Representatives was embarrassing, especially the decision not to vote on Hurricane Sandy relief.

This has been the pattern for the past few years. Do you remember what the sentiment was like in the summer of 2010?

On July 1, 2010, with the S&P 500 at 1,027 and down 15% from the April highs, many were expecting the second half of the year to be even worse. The fears over a default by Greece or Spain and the potential for a double-dip recession led the concerns, as discussed in this article from CNNMoney.

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The weekly chart of the NYSE A/D line from Stockcharts shows that the April 2010 highs in the stock market were confirmed by new highs in the A/D line (point 1). This was not consistent with a new bear market. The July 1 lows did hold, and the A/D line signaled that the correction was over in early September.

Just over a year later, the scenario was much the same, as the market had taken a beating over the debt-ceiling impasse in August. By September, the concerns over the health of the global economy and Euro debt crisis had reached a fever pitch. In reaction, the stock market lost $500 billion on Thursday, September 22.

The A/D line was acting much stronger, as it made another new high in early July 2011, confirming a healthy market. The selling climaxed on October 4, and the daily A/D lines on the S&P 500 and Dow Industrials completed their bottom formations on October 13.

The weekly A/D line had again made new highs by early 2012 (point 3) as stocks were up sharply in the first quarter. The sharp correction in May and early June was once again fueled by Euro debt concerns and weakening economic data. The decline helped to validate the conviction that one should “sell in May.”

A review of the historical patterns in presidential election years suggested that maybe 2012 was the year to “buy in May,” as the A/D line had confirmed the market highs in the spring of 2012.

The daily A/D line bottomed in early June (see chart) as the weekly A/D line tested its uptrend (point 4). There were further new highs in September (point 5), and after the drop in November, the A/D line has accelerated to new highs again this week.

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Tickers Mentioned: Tickers: SPY, DIA, QQQ, IWM, IYT