What the Market Is Telling Us Now

04/24/2008 12:00 am EST

Focus: MARKETS

Howard Gold

Founder & President, GoldenEgg Investing

The markets may face a key test in the days ahead.

The Dow Jones Industrial Average has surged 1,000 points from its closing low on March 10th, and the Standard & Poor's 500 index is up more than 100.

So, where do we go from here?

The rally has been broad and global following the Federal Reserve's "rescue" of Bear Stearns. By engineering the takeover of that failing institution by JPMorgan Chase and opening its discount window to investment as well as commercial banks, the Fed has made it clear it will do whatever it takes to prevent a meltdown of the financial system.

As a result, there seems to be growing conviction among professional and individual investors that the worst of the financial crisis is over. While credit markets remain shaky, some measures of risk have fallen markedly in recent weeks.

And as earnings season continues, investors are shrugging off the bad news more easily.
Maybe a lousy quarter isn't such a big deal for people who have just looked into the jaws of financial Armageddon.

Plus, the economic data aren't nearly as dire as many expected-besides housing, that is.

All of this, plus the Fed's multitude of interest rate cuts and the strength of economies elsewhere on the planet, has given the bulls hope that whatever we've just been through-deep correction, bear market, or what have you-is behind us.

Indeed, an analysis of volume and trading patterns since the March 10th low suggests that the momentum has been strongly in the bullish camp.

I looked at the seven biggest up and down days on the New York Stock Exchange since the market's closing low and found that both volume and market breadth were decisively bullish.

The average NYSE volume on big "up" days was 1.837 billion shares; on big "down" days it was 1.556 billion shares.

Similarly, market breadth, as measured by advancing vs. declining stocks, showed a big advantage for the bulls: nearly five to one on big "up" days vs. only 2 ? to 1 on the big "down" days. (The stats for Nasdaq trading showed a pretty even breakdown between bulls and bears, however.)

Technical analyst John Bollinger also pointed out in Gurus' Views and Strategies that net new highs are outpacing net new lows, another positive sign.

The chartists, of course, go with the flow, so they'll stick with the big move for as long as it runs. But technicians aren't quite ready to declare a new bull market is upon us

They say that we've approached new "resistance" levels at Dow 12,800-13,000 and around 1400 in the S&P 500. Both indexes will have to break decisively above those levels, close there and stay there for technicians to declare a new bull is running.

"This bear market is not over until that resistance level is overcome (or until another bottom is eventually established at much lower prices)," wrote Lawrence McMillan in Gurus' Views this week. Mark Leibovit of VRTrader.com agreed.

The Dow did break through the technicians' glass ceiling last week, echoing a big recent surge by the key Dow Jones Transportation Average. But the S&P 500 fell short.  The chartists say it must move smartly higher-and soon.

"It is decision time for the market," writes Michael Kahn in Barron's Online.

But beyond the rarefied world of moving averages and resistance levels, what exactly is the market deciding? As we know, the stock market generally predicts what's going to happen in the economy six months to a year ahead.

So, if stocks continue to move higher, it's likely that the Fed's rate cuts and other measures will work. We'll avoid a financial meltdown and will have a mild recession or none at all, much to the chagrin of the permabears. And in 2009 the economy will start to recover.

If the current bullish move fails and stocks head lower again, then the prognosis for the economy will be much poorer.

A few weeks ago, I suggested it was time to start nibbling at stocks again, and I have done so myself, through small positions in exchange traded funds and mutual funds. 

And right now, I'm waiting for the market to tell me whether to commit more. As I write this at midday Thursday, both the Dow and S&P were rallying strongly. "Decision time" may come sooner than we think.

Howard R. Gold is executive editor of MoneyShow.com. The opinions expressed here are his own and do not necessarily reflect the views of InterShow.

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