When is Uphill Downhill in the market?- Right now.
The market's job is to cause the greatest amount of pain and confusion for the maximum number people as much of the time as possible. The market is very good at its job.
The NASDAQ made a new 52 week high on Friday, and challenged 1700. The S&P broke the 1,000 barrier, and the DOW closed above 9,000. All in all, an incredibly bullish week. Why? Certainly, the economy is not running up as fast as the market.
In a phrase- "Cash is Trash"- That's why the market is rocking. The accommodating stance of the FED has pumped a ton of liquidity into the system. Interest rates haven't been this low since the Eisenhower administration. Two months with no major cataclysmic international events have allowed investors to believe that fiscal stimulus will work if given the chance. Fear levels have diminished. The only place to get any kind of return is in the stock market.
Fund managers are being forced to chase performance. Traders are frustrated as stocks continue to move up illogically. Record levels of cash coming off the sidelines have collided with record high short positions to create the "Perfect Storm" of appreciation.
Uphill is downhill in the markets right now because stocks have an anti-gravity feel to them. The markets are climbing the charts because uphill is the path of least resistance. The oppressive weight of unlimited supplies of stock has been lifted, and in a refreshing change short sellers are being blown up as stocks move north.
This chart shows the big picture on the NASDAQ. Technicians describe the 2100 high made in January of 2002 as the right shoulder of a massive, three year head and shoulders formation. Between January and October of 2002 the pattern completed as the NASDAQ was cut in half again to the October low of 1100.
Since the October low the NASDAQ has retraced a little more than 50% of the right shoulder drop, suggesting this phase of the rebound has nearly run its course. This massive blow off reflected the economic and market climate associated with Enronitis and war with Iraq. The 50% rebound of the loss reasonably reflects investor perception of a high probability potential economic recovery.
What's Next?
Pictured here is a chart of the QQQ's, my favorite security for trading the market. I've drawn a support line as measured from the beginning of the current trend. The market can come back down to meet the trend line without a major trend reversal.
I believe this trend has the potential to continue for some time. In fact, a pullback to the trend line would be healthy for the market, as it would allow exasperated fund managers an opportunity to establish positions at more reasonable levels. In fact, further appreciation from these levels without some sort of breather would be unhealthy for a long term uptrend. If the market gets too far ahead of itself investors will have to pay too much for stocks. Then, a spark of fear could send the markets tumbling from unrealistically high levels, and once again chase beleaguered investors to the sidelines to lick their wounds.
If I were a betting man, I would bet there is money to be made over the next two weeks in shorting or buying a put on the QQQ. However, I am not prepared to make it a Trading Alert quite yet.
A pullback from current levels would be the "logical" outcome of this chart. Right now, the market is not in a logical mood. The market is choosing to punish short sellers and investors who have stayed on the sidelines for too long, and probably will continue to do so until every one has thrown in the towel. Then the reasonable retracement will come.
(C) OTCJournal - June, 8 2003
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