There was a time when you could buy a security, almost any security and know that in a short space of time you could sell it at some profit. Or, if your approach was a little more advanced, then you might be able to borrow and sell a security, almost any security and know that in a short space of time you could buy it back at a lower price and net some profit. Those truly were some good times, if you knew what you were doing and didn’t bet against the market at least.
I don’t mean to convince anyone that the buy-and-hold strategy is a thing of the past. There hasn’t been any fundamental change in how the stock markets work to convince me that the markets have lost their upward bias. That being said, if there is less than 15 years between you and retirement, you would do well to have you money actively managed by someone that isn’t limited in the directionality of their bets. We really are in a time when traders should be having their run of the markets. Take the DOW or S&P or any other broad based index, and looking back about two years it is clear that the general stock market bottomed in March of 2009. And since then has been steadily marching upward and onward. But, as many economists can tell you that is to be expected as things normalize after a huge panic driven drop. The disagreement arises when it comes to what happens after the initial market rally.
Outside of the short-term noise that is produced from security markets being arbitraged, there is still some underlying macroeconomic influence on the long-term performance of the stock market. Now, the stock market is considered a leading macroeconomic indicator, meaning that its performance foreshadows that of the overall economy by about three to four fiscal quarters. We saw clear evidence of this with the markets turning around in Q1 09 and the economy officially coming out of recession in Q4 09. There is some consensus among economists that GDP growth going forward will be subpar for quite some time, so that says to me that there wouldn’t be a fundamental basis for spectacular year-on-year returns being generated by the stock market. This leaves only arbitrage driven mid-range volatility with some upward bias; a trader’s market.
For those of you that have the knowhow and ability to short indexes or take on short exposure, I would like to bring a short play to your attention. I focused on the DOW, even though I don’t think it’s a very good barometer of the true market enough traders and investors pay attention to it to make it relevant. My technical analysis was very simple but I believe it to be in conjunction with the widely accepted fundamental agreement. I simply looked at the rate of change of the rate of change [or second derivative] of DOW monthly high versus low prices since the market bottom made last March. What I’ve noticed is that the second derivative of the highs is shrinking faster than that of the lows. Meaning the index should soon start making progressively lower highs with lows remaining tightly range-bound, until they too start making lower lows. All said, I expect somewhere around a 10% percent correction from near current levels which should put the DOW somewhere in the range of 9800 to 9750. I wouldn’t feel comfortable putting an exact timeframe on this play, but it should be kept in mind as an intermediate term target, it is important to keep in mind however, that my analysis was done using monthly data so this should play out over a period of months not days or weeks. This information is meant to be used in determining the short-term directional bias for trading not an out right short on the index as this could result in intraday and intraweek margin calls based on overall market volatility. Data from momentum, relative strength, and rate of change indicators also seem to support my assumptions about the pending directional shift.
Keishaun Mark is an exclusive contributor to Bonds Mutual.
