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The big test: How long will it take this rally to bust through 1,000 on the S&P?
07/28/2009 6:53 pm EST
This rally looks like it has enough momentum to get through the 1,000 barrier. It sure helps that the big alternative to stocks, money market funds, are paying just 0.5% right now. With lots of cash on the sidelines I do think we'll get through this level even if it might take a while. The Standard & Poor's 500 stock index closed at 980 on July 28.
Why is 1,000 so important as a barrier?
First, although we investors may pretend that we're rational to the core, the truth is that we're as much followers of omens as the residents of medieval Europe who thought the world had to end in the year 1000. The market always struggles with these big round numbers just because in some of our bones we believe that "Hey, it's got to stop here."
Second, the 1,000 level marks a 38% recovery of the entire bear market drop from its October 2007 peak to its (current) March 2009 bottom. Tracking stocks with the commonly used RSI(relative strength index) shows that the market is now overbought for the first time since the rally started in March. In addition a move to 1,000 on the S&P would be a 50% gain from the March bottom.
Any technical analyst or stock market historian worth his or her salt knows that rallies tend to fail at these numbers. A 50% gain, for example, is the historical average for cyclical bull market rallies, according to John Murphy, one of my favorite technical analysts.
Even if you think technical analysis is just mumbo-jumbo and that stock market history is powerless to affect the present, the mere fact that so many investors follow these indicators gives them power over the market. Even if it is just the power of self-fulfilling prophecy.
So I wouldn't be surprised to see stocks struggle here. It's one reason that while I've bought a bit lately, I'm still happy to be sitting on 38% cash in my Jubak's Picks portfolio. Nothing like buying on the dip.
But as I wrote on the first day of this blog, July 15, the amount of money on the sidelines is likely to limit any retreat. There are simply too many investors who missed out on the rally who will want in on the first drop.
I'd put professional money managers among that band. You might even say they'r leading the parade.
Getting killed in a bear when everyone else is getting killed is something their clients may be willing to forgive. Missing out on a rally--after getting killed in the bear market--would be, many managers fear, the last straw. Clients will move their money if at the end of their fiscal year they lag the rally by too much.
For a lot of money managers that fiscal year ends not in December but in October.
Think they'd like to get in before the clock runs out?
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