The most dangerous phrase in investing is this time is different, say the analysts at Epic Advisors. Lulled into the view that the markets have permanently evolved, those grasping at such beliefs are ultimately devastated. After all, ask Internet investors how valuing start-up companies based on numbers of eyeballs worked for them.
Knowing we should be skeptical of discarding time-tested methods, we must also watch for the evolution of investor expectations. An example would be the recent stock market rally. History has taught us that bear markets do not bottom when everyone is looking for a bottom. Instead, markets bottom when investor apathy dominates and people are disinterested in buying stocks. Only then have traditional investors been forced from the market so a solid base for future rallies can be built. While I agree with this sentiment on both an intuitive and historical basis, I must question whether this time is different. The advent of blogging, improvements in technology and the evolution of the financial news industry have created a limitless supply of opinions on the state of the market.
Knowing that pundits' careers are enhanced by making bold, correct opinions, I believe we have reached a point where CNBC will always find someone attempting to call a bottom and Web sites will always provide well-reasoned ideas supporting a new bull market. As media has evolved, maybe this time is different. Perhaps this bear market will not end when everyone has lost interest, but will cease when selling has reached a peak and some are calling it a bottom.
As for myself, I'm not ready to ride the media wave. Instead, I will watch the longer trends to determine where prices will go. For now I maintain my view that the primary trend of the market is bearish and lower prices await. Having experienced a strong rally, investors are now confronted with first-quarter earnings reports. With expectations low, but stocks having already rallied, gauging the path of prices will be difficult.
Based on the limited reports we have seen, results are mixed. Wells Fargo's (WFC) profit surprise sparked a sharp rally, but Goldman Sachs (GS) posted excellent earnings and saw its shares trade sharply lower. I expect this pattern to continue as some companies surprise and move higher while most companies see investors sell stocks in order to realize the profits that have been earned since the March low.
As prices trend lower on profit taking, we must watch key levels on the three broad U.S. indices - the S&P 500, Dow Jones Industrial Average (Dow), and NASDAQ. All three have rallied strongly and now sit well above their 50-day moving averages (MA). On this pullback, I expect the 50-day MAs to offer the first line of defense. If prices can stabilize at those levels and then move higher, the odds of a bottom having occurred increase dramatically.
Therefore, over the next two weeks, digest earnings announcements, attempt to divine the winners from the losers, and carefully watch the MAs-S&P 500 is 789; Dow is 7,534; and NASDAQ is 1,484. Declines from these levels should scare many who have been chasing this rally higher. The ability to absorb fear-based selling and then push higher would be very constructive and point to higher prices over the coming months. While I'm hesitant to call a market bottom amidst so many pundits doing the same, perhaps this time is different.
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