This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Waiting for a Catalyst, Watching the Fed

This column was originally published on RealMoney on Oct. 31 at 12:12 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.

Most investors know that October is housecleaning month for the mutual fund industry. With the fiscal year-end at Oct. 31, fund managers prune their portfolios, dumping their losers. The recent selling pressure on the broader market can be partially attributed to this. With that behind us, the market should gain some room to move to the upside.

I am looking for a catalyst that will get the market out of its doldrums. Perhaps it will come from the Federal Open Market Committee meeting Tuesday, additional declines in oil prices or evidence that inflation is benign.

For anything other than very short-term moves, it is important to understand the underlying conditions that are affecting the market. After all, if you don't have a good thesis for your positioning, every little jiggle in the market will elicit a reaction from you. Rather than go down that bumpy road, focus on understanding the bull and bear arguments. If you know both sides and then choose, you are better able to control your own destiny by making a conscious choice based on more complete information.

I believe the current volatility in the market is due in part to the absence of clarity with respect to some very fundamental economic conditions. There are several questions that I'll need answered before I'll feel any degree of commitment to the bull or the bear side:

  • Does the Fed even try to distinguish between commodity-based inflation and inflation derived from pure pricing power in a very strong economy?
  • If rates keep rising, will the real estate market gently flatten, or will it turn out to be a bubble that pops?
  • And when real estate slows down, to what extent will this affect the average consumer's spending habits? If, for example, we sustain a deep pullback in real estate values, will the resulting "poverty effect" reduce demand so much that that inflation fears just fade away?
  • I suspect we'll get some clarity from the FOMC on Tuesday, which should help answer some of these questions. And if we don't get clarity, I suspect November will go the way of October.

    Let's get to the charts.

    Last week, the Dow Jones Industrial Average bounced off established support. Take a look at the bigger picture and you'll see that the Dow has actually been consolidating its 2003 gains for the last couple of years. Right now, the most upside I see is around 500 points, to 11,000. If the Dow hits that level, we'll probably see the same selling pressure that has kept a lid on the Dow for quite a while.

    I also see a downside of around 500 points. If the Dow falls back to around 10,100, dip-buyers will likely halt the downtrend. Before I'd adopt any kind of commitment to market direction, I'd have to see the Dow break out of this channel.

    On Friday, my friend Fari Hamzei of HamzeiAnalytics.com mentioned to me that his indicators were quite bullish on the S&P Select Financial SPDR Fund (XLF). A quick look at the chart shows that the fund is at the top of its range, with steadily rising lows. An RSI within the top half of the clip and rising on balance volume are two bullish indicators that support a breakout. However, notice that the peak in July was accompanied by the same combination of indicators -- resistance held back then. I'd like to see more evidence of strength before jumping in.

    Wells Fargo (WFC) accounts for 4% of the holdings in the Select Financials SPDR. This stock is at midchannel. It's moving higher, so the bulls have the edge now, but until the bulls push through resistance at $62.50, I'd just stay on the sidelines. On a $60 stock, a $2 upside prior to resistance isn't my kind of trade.

    REITs have been on fire for a number of years, but every once in a while they really take a hit. We saw a sharp pullback during the second quarter of 2004 and during the first quarter of 2005. Over the past several weeks, the Dow Jones Equity REIT Index has pulled back by more than 10%; however, this chart shows price action that is indicative of a bounce. The thrust beneath $225 a few weeks ago was rejected by the bulls -- they finally bought the dip. The lows over the past couple of weeks have been successively higher. That is illustrative of increasing aggressiveness by the buyers.

    Remember that REITs tend to be made up of rental properties, so you're not buying Pulte Homes or Toll Brothers. Many REITs also have fairly good dividend yields, so this increases their attractiveness on dips. If you've got a place in your portfolio for real estate, I'd suggest considering REITs such as Equity Residential Properties Trust (EQR) and Aimco (AIV).

    AmerUs Group (AMH) has been consolidating over the past couple of months, with $57.50 defining the excess supply level. Each time the buying takes the price up to present levels, sufficient supply halts the price advance as buyers soak up the supply. However, at some point this supply will diminish and buyers will chew through the $57.50 level. If this occurs, the uptrend will resume as stockholders start demanding higher and higher prices.

    Be careful out there.

    P.S. from TheStreet.com Editor-in-Chief, Dave Morrow:
    It's always been my opinion that it pays to have more -- not fewer -- expert market views and analyses when you're making investing or trading decisions. That's why I recommend you take advantage of our free trial offer to TheStreet.com RealMoney premium Web site, where you'll get in-depth commentary and money-making strategies from over 50 Wall Street pros, including Jim Cramer. Take my advice -- try it now.

    Dan Fitzpatrick is a freelance writer and trading consultant who trades for his own account. His columns focus on quantitative strategies for trading and investing. Fitzpatrick is a member of the Market Technicians Association and manages The Stock Market Mentor, a Web site focusing on the proper use of technical analysis for trading and investing. At time of publication, Fitzpatrick held no position in any stocks mentioned, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Fitzpatrick cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.

    Select the service that is right for you!

    COMPARE ALL SERVICES
    Action Alerts PLUS
    Try it NOW

    Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

    Product Features:
    • $2.5+ million portfolio
    • Large-cap and dividend focus
    • Intraday trade alerts from Cramer
    • Weekly roundups
    TheStreet Quant Ratings
    Try it NOW
    Only $49.95/yr

    Access the tool that DOMINATES the Russell 2000 and the S&P 500.

    Product Features:
    • Buy, hold, or sell recommendations for over 4,300 stocks
    • Unlimited research reports on your favorite stocks
    • A custom stock screener
    • Upgrade/downgrade alerts
    Stocks Under $10
    Try it NOW

    David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

    Product Features:
    • Model portfolio
    • Stocks trading below $10
    • Intraday trade alerts
    • Weekly roundups
    Dividend Stock Advisor
    Try it NOW

    Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

    Product Features:
    • Diversified model portfolio of dividend stocks
    • Alerts when market news affect the portfolio
    • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
    Real Money Pro
    Try it NOW

    All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

    Product Features:
    • Real Money + Doug Kass Plus 15 more Wall Street Pros
    • Intraday commentary & news
    • Ultra-actionable trading ideas
    Options Profits
    Try it NOW

    Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

    Product Features:
    • 100+ monthly options trading ideas
    • Actionable options commentary & news
    • Real-time trading community
    • Options TV
    To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
    Submit an article to us!
    DOW 17,086.63 -26.91 -0.16%
    S&P 500 1,987.01 +3.48 0.18%
    NASDAQ 4,473.6970 +17.6810 0.40%

    Brokerage Partners

    Rates from Bankrate.com

    • Mortgage
    • Credit Cards
    • Auto

    Free Newsletters from TheStreet

    My Subscriptions:

    After the Bell

    Before the Bell

    Booyah! Newsletter

    Midday Bell

    TheStreet Top 10 Stories

    Winners & Losers

    Register for Newsletters
    Top Rated Stocks Top Rated Funds Top Rated ETFs