(04/27/12) Really, Don't Fight the Tape

And from all the analysis we've done looking over the charts for the past five years, it looks like there is no tolerance for any negative surprises, writes Peter Way of Block Traders' ETF Monitor.

Does an election year equate to a bull market? The cynics among us might say so.

Certainly there are those who suspect that economic data from government sources might just get biased a bit toward the constructive, recovering, optimistic side. (It's good for re-election.) And then there are those who just don’t believe any economic data emanating from within the Beltway.

How about data coming from Wall Street? Now there’s a quandary. It’s lots easier for both bulls and bears to make money when the market is moving up. There appears to be a lot more of it circulating, and folks are eager to grab a bite if it gets close enough to them.

So, even though major market moguls may be off-put by their recent treatment by the current administration, even to the point of contributing more to the campaign coffers of the political competition, they know what winds their clocks, and that of the investing public.

The net result appears to be a shot of some kind of quasi-sedative to calm down investors and the market until the election is over. Typically a Republican incumbent in the White House would like to see a market galloping ahead in the months before the vote. It looks like the Democrats just want to avoid any negative actions that might remind voters of how bad things have been—or that might come back.

Recently, we charted out the past five years’ variations in the balance between investor hopes and fears. Of late, the pattern that nets downside against upside is uncharacteristically stable. One major presence that is quite abnormal, and persistent, is an apparent denial of the likelihood of any serious downside price movements.

The present mental posture seems like “what, me worry?” on steroids. Months ago, when this condition first appeared, we thought it would be temporary and then disappear after recession/depression fears settled down. Now our diagnosis has more staying power to its presence.

If that is the way it works, then a basic strategy ought to be to be an active buyer in any market dips. That requires having some buying power available. One way to do that without missing market gains is to have specific sell price targets for each stock or ETF, set at the time of purchase. Then, when buy opportunities appear, sources of funds candidates are the investments closest to their planned exit price.

That is why our descriptive data tables contain upper price limits to their forecast ranges, identified as sell targets. We find the best discipline is to identify that target at the time of purchase and hold it unchanged.

When a sell target is reached, that investment can, and should, be included in the exploration for reinvestment of the newly-liberated funds. Its current upside and downside prospects then provide another alternative to be considered.

It sometimes happens that the investment about to be liquidated has more satisfaction in prospect than any other. If so, set the new price range high as the revised sell target, and reset your holding patience time limit to run from that date. But keep records of each investment parameters so that future comparisons are easily made.

Here is the way the market-making investment professionals are viewing the ETF market’s divisions now: As in the recent past, they see little price upside or downside changes to protect against in the major market indexes.

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