Weekend Review 01/27/12

 It is documented that some of the largest and swiftest swings from lows occur during bear markets, so the initial move on the NASDAQ of 17% from the October 3^rd low was greeted with justifiable skepticism. Historical evidence could lead one to conclude that this may be a “bear trap” and the following decline of nearly 11% would have reinforced this belief. The continued volatility during this stretch would have furthered skepticism as well.

 The subsequent moves when looked at more closely yielded clues giving increased validity to an established bottom being in place. The beginning of the move occurred after undercutting the August low with downside breadth exhausting itself. The ensuing pull back of 8% was followed by a 5% gain and the subsequent pull back of 5% put in a key higher low inflection point. In addition, the width of the daily range began to tighten up as well with volatility decreasing as indicated by the lack on 1%+ daily swings.

 Once the new uptrend established itself and more participants began to believe in the underlying rally the louder the chorus of “pull back” could be heard. It's only human after all that people who missed the train would yearn for it to wreck. I thought two weeks back that a pull back was on the horizon and acted in accordance with this belief by taking much smaller positions, so while I managed to participate in most of this rally I clearly wasn't taking the ICE.

 Recently "Market Wizard" Mark Minervini  published a blog post about "lockout rallies"  A key point that he emphasizes is:

Many inexperienced investors will be looking to buy a pullback, which rarely materializes during the initial leg of a new powerful bull market and from the onset may appear to be overbought. 

Even though I've read this and understand the implications of what is being said, I approach this upcoming week not giddy, but even more cautious. The rally has just had a 10% up leg without pause and clearly broke through what I believed to be a key inflection point, the October 27 high. The length of the entire move has pushed the Russell, Wilshire, and NASDAQ up 20%, an accepted metric of when bull markets begin. 

%Move From Bottom and Proximity to 52-Week High

 I think it foolish to argue against the legitimacy of this move, and perhaps I should throw out caution and push my positions, but I'm going to side with my current understanding of the underlying market structure from a breadth perspective and maintain a state of gingerly tip-toeing through positions with reduced capital risk and focusing on shorter term holding periods and stocks that are not extended.

Key Points I am looking at this week:

1)  There has been a lack of volume during this most recent leg as indicated by the entire month of January being on below average volume as shown on the SP. Technically this is considered weak action and while this may be true, it does not necessarily follow that this rally itself should be looked upon suspiciously as there has been a steady stream of continuous buying coming into the market.

This lack of volume may simply be due to a lack of interest and/or belief.  There may be plenty of money lined up on the sidelines in anticipation of a pull back before entering and there may still be a large number of people who just don't believe yet.  Unless there is large volume selling hitting the tape, it is my contention that volume will pick up with increased participation.

SP Week of 01/27/12

 2) The $BPNYA has moved above 70. This indicates that 70% of stocks based upon Point and Figure charting are in a confirmed uptrend. When this moves above 70 it suggest an over bought environment where the potential of a pull back increases in probability.  

$BPNYA > 70

3) A secondary signal I follow on the Market Monitor shows frothiness in the market.  I've noted in the past that  it has proven most useful to me to be cautious when it signals.  

This market may very well  rip higher and continue the "lockout" effect.  As a result I may miss out on the potential.  However, the fact remains that there will be a pull back at some point and I'd rather keep light on my feet and miss a few opportunities here and there and bide my time for a sweeter spot.