Is it Time to Chase the Rally?

Focus: MARKETS

Jim Jubak Image Jim Jubak Founder and Editor, JubakPicks.com

You may be itching to get in, but tread carefully. Events over the next couple of weeks, including the apparent debt deal in Europe, will offer clues about the market’s direction.

Should you go with the mo’?

You know, the momentum. The tendency of stocks that have been going up to keep going up (until they don’t, of course). The successful investment strategy built on the observation that stocks are the only things that people want to buy more of as they get more expensive.

From the October 3 low through October 26, the S&P 500 was up 13%. That’s enough to put thoughts of 2009 in anyone’s head. From the March low that year, the S&P 500 rocketed ahead 13% in just about two weeks—and from there it had almost an additional 1,000 points to go before it topped out on April 28, 2011.

On the other hand, going with the mo’ is one thing, but nobody wants to be Curly or Shemp. The rally from the August 19 bottom to the August 30 high took the S&P 500 up 10%—but it wasn’t followed by two years of roaring rally.

Instead, stocks reversed, and by October 3 they had tumbled to a level below where they were on August 19. If you’d bought on August 30 after that 10% move up, you would have been left looking at a 9% loss by October 3.

So should you go with the mo’? Should you hold positions that have rallied 13% or more in a little more than three weeks, because momentum will take them higher?

Should you buy in now if you’ve been sitting on the sidelines?