The Trader’s U E-Letter: Issue # 183
Wednesday, April 12, 2006
S&P 500 Performance: The Index Has Been Strong, But How Much Longer Will It Last?
by D.R. Barton, Jr., Chairman, Trader’s U
Imagine taking a three-mile run without exhaling…
No one in his right mind would think the stock market acts with the regularity of the rising sun. But it has gone quite a long time without exhaling.
To be blunt, the U.S. stock market has been in an unrelenting uptrend for three years now. Since March of 2003, the market (I’ll use the performance of the S&P 500 Index as a market proxy) has gone up 67%, and has done so in a very methodical fashion.
Moreover, it’s been accompanied by a most unusual trait: There have been no 10% retracements since March of 2003. How significant is this? Take a look at the chart below, and let’s compare this three-year run with the famous one that led up to the 2000 market top…
Most everyone remembers the huge run-up to the March 2000 top that has been dubbed the “Internet Bubble.” But in every march up to the top (including early in 2000), there was at least one 10% retracement.
So What Does This Mean for the Stock Market?
We have been in a very comfortable up-market that’s had relatively low volatility for three years. Those who don’t remember the volatile moves of the late 1990s or of early market periods could be lulled into complacency. Here are a couple of useful ideas to consider for your trading and investing strategies:
- If you are a long-term investor (holding positions for a year or more): Be thankful for the supportive market. BUT – make sure you have firm exit strategies when the next significant market retracement hits. Notice I said “when,” not “if.” The Oxford Club recommends 25% trailing stops for long-term positions, and that’s a good place to start.
- If you are an intermediate-term investor/trader (holding positions for weeks or months): Be aware that the market is showing topping behavior, but has not given us confirmation of an intermediate top. Business as usual is fine, but note that the market could finally exhale.
- Short-term traders: Enjoy the added volatility that April has provided. Don’t get caught in traps of trying to pick “The” top. Bearish calls abound, but the market has trudged along for three years and could provide more of the same performance for an extended period.
Today’s Trader’s U Tips & Tricks
- There’s another indicator that’s been signaling an overdue exhalation… Check out Trader’s U #176, The Stock Market Tries for New Highs: Use Caution When Investing… and find out why the Volatility Index is widely called a “gauge of investor fear.” It’s one of the sentiment indicators that analysts use to determine overbought and oversold markets. Combined with the lack of market momentum, this indicator is pointing to an overbought market that is ready for a correction.
- And the stock market isn’t the only overbought market… Dr. Mark Skousen presents his take on the real estate bubble in Investment U #515, 2006 Housing Market Bubble: Today’s Selloff In Real Estate. He also points out how to make money in today’s real estate market.
The Chart of the Week
Red Hat (Nasdaq: RHAT) tested its January highs yesterday and failed. A tight stop above the January highs could make for a juicy short.
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