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Farrell retired in 1992, but his famous “10 Market Rules to Remember” have lived on and are summarized below, courtesy of The Big Picture and MarketWatch (June 2008). The words of wisdom are timeless and are especially appropriate at the start of a new year as investors grapple with the difficult juncture at which stock markets find themselves at this stage. 1. Markets tend to return to the mean over time 2. Excesses in one direction will lead to an excess in the opposite direction 3. There are no new eras – excesses are never permanent As the fever builds, a chorus of “this time it’s different” will be heard, even if those exact words are never used. And of course, it – human nature – is never different. 4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways 5. The public buys the most at the top and the least at the bottom 6. Fear and greed are stronger than long-term resolve 7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names 8. Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend 9. When all the experts and forecasts agree – something else is going to happen Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest. 10. Bull markets are more fun than bear markets Sources: The Big Picture, 17 August, 2008 and MarketWatch, June 11, 2008.
Richard Russell, 88-year-old writer of the Dow Theory Letters, called a bear market for U.S. stocks a few months ago. An update on his latest thinking is reported below. Question: Richard, everybody has emotions. So where are your emotions regarding this market? From an emotional standpoint, be honest, are you really bullish or bearish? Answer: If the Averages confirm that this is truly a bear market, I’ll have mixed emotions. On the one hand I will have been proven right on my bear market call, and that will be a boost to my ego. But I can’t say I’d be happy we’re in a primary bear market. But if the Averages close above their May peaks, and all my charts point to a bull market, I’ll have been proven wrong on my bear market call, and that will be a bruise to my ego. Source: StockCharts.com Nevertheless, I’d much rather be living through a bull market than a bear market – a bull market would be far better for me and my kids and for my business. So call it strange, but from an emotional standpoint I’d prefer to have been wrong on my bear market call, and I’d prefer that we’re in a re-confirmed bull market. Therefore, instead of confusing my subscribers with a lot of ego-boosting baloney, I’m just going to call this market the way I see it, being as honest and unemotional as I can possibly be. If we are truly in a primary bear market, I have an intuition that it could turn out to be the worst bear market in history – and that’s another reason why I secretly hope I have been wrong on my bear market call. Another intuition – we will know the final answer as to whether we’re in a bull or bear market by October. [PduP: Yesterday’s closing levels of the benchmark U.S. indices were within reach of the May peaks: Dow Jones Industrial Average – 13,176 vs 13,279 and S&P 500 Index – 1,402 vs 1,419.] Source: Dow Theory Letters, August 7, 2012.
I published a post yesterday on the short-term technical outlook of the U.S. benchmark S&P 500 Index, referring to conflicting indicators but stating that the rally could have more legs. When the message of the short-term charts is murky, it is often useful also to consult long-term indicators to provide some guidance. Let’s consider, by means of example, monthly data for the S&P 500. A simple 12-month rate of change, or ROC, indicator seems to pick up the major turning points quite well. Let me say straightaway that monthly indicators are of little help when it comes to market timing, but they do come in handy for defining the primary trend. The ROC line below zero depicted bear trends quite clearly, as in 1990 (not shown), 1994, 2000 to 2003, and from 2007 to March 2009. Right now, the ROC line is “safely” in positive territory after threatening to breach the zero line in June. The combination of a series of higher lows (i.e. rising bottoms) and positive longer-term momentum probably gives the bulls the benefit of the doubt, but needless to say I will be watching this space quite closely. Source: StockCharts.com
The comments below were provided by Kevin Lane of Fusion IQ. As seen in the chart below the S&P 500 Index held its 100-day moving average yesterday (green line) near 1,350 and today is bouncing on ECB news and better-than-expected-non-farm payrolls – does anyone smell election year mark-ups? That said, the Index is still setting higher lows since its June low, which is bullish; however it has also been capped near the 1,385 area (red line) for a while now. The Index continues to remain locked in a range, with resistance at 1,385, and near-term support at 1,350. [PduP: The closing level on Friday was 1,391.] Whichever way it breaks, momentum will surely follow. More meaningful support lies near the 1,330 – 1,325 band (purple-shaded lines and arrows) as this was the area where the S&P 500 double-bottomed recently. This is the area that is most critical in regard to keeping the market together. There are conflicting data that could support a breakout (i.e. more consistent levels of news highs, low long exposure levels and low levels of bullish sentiment) or a breakdown (i.e. weak action in cyclicals and transports, especially truckers). However, if forced to choose, we are leaning towards an upside breakout. That said, we won’t be ashamed to pull the rip cord if key supports are broken as this would take the breakout call off the table. After all, being wrong once in a while is inevitable, however, ignoring an oncoming truck (i.e. a break of support) assuming you can swerve around it, is never a smart strategy! This game is about knowing when to press forward, when to sit tight and watch, when to retreat and, most important, knowing when to change strategies if need be! Source: Source: Kevin Lane, Fusion IQ, August 3, 2012.
During times of great uncertainty regarding the outlook for stocks, I often focus on long-term indicators to provide some guidance. Let’s by means of example consider the U.S. benchmark S&P 500 Index. A simple 12-month rate of change, or ROC, indicator seem to pick up the major turning points quite well. Let me say straightaway that monthly indicators are of little help when it comes to market timing, but they do come in handy for defining the primary trend. The ROC line below zero depicted bear trends quite clearly, as in 1990 (not shown), 1994, 2000 to 2003, and from 2007 to March 2009. Right now, the ROC line is on a knife’s edge and is perched only 1.9% above the zero line. I will, needless to say, be watching this space quite closely. Source: StockCharts.com | ||||||||||||||||||||||||||||||||||||||||
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