Trading is not a game of exacts. Perfectionists need not apply. Markets are made up of many irration...
A Fork in the Road for the Market
03/08/2007 12:00 am EST
Bull markets like to 'climb a wall of worry,' and this past week saw an unusual amount of worry in the market. The bears point to a declining US economy, the potential for rising inflation, the concern over a Greenspan recession, the rising price of oil, a cooling of the China market, the instability of emerging markets as nothing more than validation that global economies are in trouble and markets are going to plummet.
The bulls believe all of this is much ado about very little. Yes, economies are slowing but not moving into negative growth. Inflation is contained. Interest rates are at near record lows, worldwide. Emerging markets are volatile, but strong. Employment is high. Job growth is strong. Based on earnings growth, stocks are cheap and have suddenly (after last week) gotten a LOT cheaper. Now is the time to be watching for a bottom and then scoop up all the bargains. I tend to agree more with this scenario.
Over the last century, the Dow Jones Industrial Average has moved from about 75 in 1900 to a little over 12,000 today. In that time, the Dow has had four times when it traded in a very narrow trading range. These are called consolidation periods. The average duration of these consolidation periods, by the way, has been 14 years.
So, where are we today and why does it matter?
The current consolidation period is only six years old. We broke out above the upper resistance level of 11,722 in October of last year. And, as of this writing, we have not retested that level yet.
[In] the pattern that is developing right now, we have seen the market move above the 11,722 level and now is moving back toward the so-called upper resistance level. This is a pattern that has been repeated in the past.
We are five months into the break-out above the upper resistance level. The Dow, after last week, was moving strongly back toward the 11,722 level.
Are we watching history repeat itself?
If the Dow approaches but does not go below 11,722 before rebounding upward, then that would be a very strong indication that we are now at the beginning stages of the next bull market that should last for a decade or more. If, on the other hand, the Dow goes below 11,722, we could easily see it stay below that level for the next six to seven years.
My current strategy is to hold a lot of cash and only be buying a very few defensive stocks, ETFs and high-yielding closed-end funds, until we see what happens if the Dow moves a lot lower or rebounds.
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