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JimVanMeerten (61.45)

Look both ways or you might be hit

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October 27, 2009 – Comments (1)

We are at a very pivotal time in the market. Half of the pundits are saying that we are headed higher and the other half thinks we are in for a big correction. What are we to do?

You know what to do, your Mom and Dad taught you before you were six. Always look both ways before you cross the road. That road is the stock market. Should you stay where you are and wait for the traffic to clear or is it now safe to go ahead and cross to the other side?

I look at the signs. Yesterday the ValueLine Index -- an index of 1700 stocks -- closed below its 20 day moving average. BarChart's market momentum showed 61% of the stocks closed below their 20 day moving averages. The ratio of stocks hitting 20 day new highs to 20 day new lows was 537/1066 = .5 , another sign for caution. No one will fault you for sitting out a day or two.

What is happening and where are we headed? The easiest way to explain where we are is to share with you my recent experience on a trip to Florida down I-95. Traffic would speed up and everyone was flying along above the speed limit. All of a sudden red tail lights flashed and everyone slammed on the breaks. This caterpillar or accordion effect happened over and over but there were no apparent accidents causing the slamming on of brakes. What's this got to do with the financial world? Let me explain.

Picture the financial world as 3 groups of cars: the stock market, the economy and company earnings. They are all traveling down the same highway in the same direction but occasionally they bunch up and the brakes get slammed on. You would think that drivers would not bunch up and everyone would just put the cars on cruise control at 70 and travel along like a train but that's not how the drivers think and neither do our 3 cars.

The stock market usually leads the way, it's a leading economic indicator, the economy is in the middle and earnings because they are reported after the fact usually follows the pack from behind. That's what is happening with our little convoy.

The stock market got too far out in front. The economy is trying to catch up and its leading economic indicators are catching up but its coincident indicators have been flat for 3 straight months. Earnings are being reported now and seem to be verifying that the stock market and economy are correctly headed higher. The stock market is slowing down and allowing the rest of the convoy to catch up. We will space out again in a week or two and the stock market will get out in front again.

On my Wall Street Survivor portfolio none of my stocks are trading below their 20 day moving average so I haven't trimmed out anything and I'm fully invested. I'll just stay on the curb right now, wait for the traffic to clear and be patient.

Jim Van Meerten is an investor and blogs on financial matters here and on Financial Tides. Please leave a comment below or email FinancialTides@gmail.com

Disclosure: I do not hold any stocks that are in my Wall Street Survivor portfolio at the time of this publication.

1 Comments – Post Your Own

#1) On October 27, 2009 at 9:23 AM, dudemonkey (37.57) wrote:

These are some interesting metrics.  As a whole, I agree with your general sentiment and, honestly, I have no clue which way the market is going to go.  I've watched some of the best market timers on CAPS make predictions and their track record is pedestrian at best.  Mine would be much, much worse.

I try to stick to looking at individual companies.  While the market as a whole could drop 20% over the next few months, does that mean that ADP, for example, will do the same?  I have no idea.  That's my takeaway from all my attempts to guess stock price movements.

I know how much ADP is worth, though, and I'll buy any time it's selling for significantly less than that.

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