Keep Riding the Bull

10/01/2009 11:43 am EST

Focus: MARKETS

Dan Sullivan

Editor, The Chartist

Dan Sullivan, editor of The Chartist, says the market may move higher before a long-awaited correction begins, but he thinks investors should stick to their guns.

The market has come under short-term selling pressure, and many analysts contend that there is more to come on the down side. Even investors who have been on the positive side of this rally are beginning to get nervous. The pundits point out that similar rallies, compacted as well as explosive, have ended badly.

The classic comparison is 1929. In a little over two months, September 3, 1929 through November 13, 1929, the Dow Jones Industrial Average dropped a resounding 48%. The snap-back rally from November 13, 1929 through April 17, 1930 saw the Dow rally 48% in five months.

At the time, many investors felt that the worst was over. [But] the nightmare had only begun. From the peak of the rally on April 17, 1930 through July 8, 1932, the Dow was all but decimated, dropping an incredible 86%.

We do not feel this comparison is valid, because the snap-back rally came after the bear market had been in effect for only two months; however, there are other comparisons. The rally off the 1932 lows, July 8th through September 7th, saw one of the most remarkable buying binges of all time, with the Dow rocketing ahead 94% in two months. Over the next six months, 80% of the gains were wiped out.

The next explosive up side [move] took place the following February. Between February 27, 1933 and May 1, 1933, the Dow jumped 55%. Investors who piled into the market at that time did very well indeed: The Dow gained another 40% over the next two and a half months. By March 1937 the Dow tacked on an additional 150%.

Coming off the 1982 bottom, the Dow gained 50% between August 12, 1982 and April 15, 1983. How did investors fare who bought in mid-April 1983 after a 50% move? Between April 15, 1983 and November 29, 1983, the Dow gained another 9.89%. [From] mid-April 1983, it proceeded to double in price over the next two and a half years.

Given that the Standard & Poor’s 500 index, the Dow, Nasdaq Composite index, [and] Russell 2000, as well as the advance/decline line, continue to exhibit textbook-like, bullish staircase chart patterns of ascending tops and bottoms, plus the fact that they are all comfortably above their up trending 50-, 100-, and 200-day moving averages, we feel that by definition the odds are weighted [towards] the market trending higher over the next several weeks. The long-awaited correction could come from much higher levels.

We feel that it is more than worth it to risk the paper profits that we have garnered thus far. The serious money in bull markets is made by investors who are in early and are not content to nail down short-term gains. This requires a combination of boldness and patience. The boldness comes by buying stocks in the early stages of an emerging bull market. The patience comes by staying the course. It is not easy.

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