Editor's note: This column was originally published on RealMoney on Jan. 25, 2008 at 4:52 p.m. EDT. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.
A lot has happened in the market this week
Jan. 22-25, so there's a lot of ground to cover, from
fundamental, economic, psychological and
technical perspectives. But only one of these will give us a truly accurate idea of what's happening in the market right now. First, let's go over a few of the issues of the week, and then hone in on what the trend is, where it is headed and what it means for the major
President Bush finally got his
economic stimulus plan approved and the White House made an announcement on the details
Thursday afternoon. The package will give most tax filers refunds of $600 to $1200, and more if they have children.
The rebate part of the plan will cost about $100 billion, along with a $50 billion package of business tax cuts. The business package will allow them to immediately write off 50% of purchases of plants and other capital equipment.
I do like the fact that the government is doing something to encourage spending on growth in capital equipment, but this package appears to be just a watered-down version of any real plan that can help our country in the long-term.
Cramer: How to Pick Stocks Now (Jan. 25)
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The market also does not seem to be applauding the unveiling of this new plan. Maybe that is because it will not really do much to stimulate our economy over the long haul, just like the similar tax rebate back in 2001.
I also think that the recent step by the
to lower interest rates along with this economic stimulus plan is nothing more than a Band-Aid that the government hopes will hold up the market into the presidential election. Eventually, the piper is going to get paid for the
subprime problems that still remain and dangerous
derivatives that still plague the market.
The Technical Perspective
Besides the underlying problems that are yet to be seen, there is a lot of technical damage that has been done to the charts. If you have been following my columns, you know that I have been suggesting that investors start moving to cash for several months now.
In fact, I started talking about the topping process in the market back in August of 2007, pointing out that in the months to come, my intermediate-term and long-term indicators were pointing to the beginning of the primary downtrend.
There was a lot of talk about the fundamental strength and the low
valuation of stocks in the market at that time. I certainly believe in the value of looking at fundamental and economic indicators, but it is extremely important to keep a close eye on the technical picture to confirm your research.
That is where a lot of research firms lead investors into a false sense of security, by pounding the table on being heavily invested because their fundamental and economic indicators are pointing to solid valuations. What these well-intentioned firms miss in their research is that fundamental and economic indicators often dramatically lag the market.
The key to well-rounded research is to do your fundamental, historical, psychological and economic research, but make sure that your technical indicators -- along with price and
volume on the indices or stocks you follow -- are confirming your conclusions.
Let the Trend Be Your Friend
That is why it is important that we keep a close eye on the indices' trends. It is the only accurate tool that can give us the leading edge of important changes in the market. Remember, when the major indices are in a primary uptrend or downtrend, the majority of stocks are going to follow suit, no matter what the fundamentals say.
The positive right now is that stocks and the indices are still sitting at
oversold levels, and that is likely to continue to lead to more upside in the short-term.
Longer-term indicators, such as the ratio between
bonds, have also reached a historical extreme. This indicator is showing extreme pessimism by stock investors that have flocked to the safety of the bond market. Currently, this indicator is showing that stocks are very
undervalued compared to bonds.
That may give investors some comfort, but looking at the indices from a short- to intermediate-term outlook, it doesn't look very encouraging. You can see that the
Dow Jones Industrials
put in a short-term double bottom and are now bouncing higher.
Since we were so oversold, it is likely that the price will move up to the 12,750-13,000 area before resuming the downtrend. You can also see at the bottom of the chart that the
institutional money stream remains well below the downtrend line.
Dow Jones Industrial Average
is almost the exact same picture as the Dow chart. The waterfall selloff came on very heavy volume, and although we will likely see bounce up into the 1400 area, the downtrend continues to remain intact. The key to watch will be when the price gets up near the resistance. If the volume starts contracting while price is moving up, it will be a sign to exit any short-term long trades
also has a tremendous amount of resistance below its current support in the 2500 area. You can see at the bottom of the chart that the institutional money stream has been very weak and has a lot of ground to make up before we can say it is in any type of bottoming process.
I started warning investors about the brokerage and financial stocks back
in June 2007 and again in
August 2007. Since then I've continue to state that I would stay away from this
sector until we have some idea how deep the subprime the debacle goes.
There is a good possibility that we may see a bounce up to the $29 to $32 area, but the trend continues to remain down.
Financial Sector Select SPDR
If you are a long-term investor who is strictly investing in
mutual funds or
ETFs that mimic the general market, and have a long-term horizon over three to five years, the recent action will likely look like a small blip on the screen.
However, if your focus is anywhere between intermediate- and long-term, then it will be important for you to pay attention to what the market is saying to avoid taking unnecessary
Unless we see some catalyst that can inspire the market to move dramatically higher, the current rally will likely give investors a chance to raise cash in order to have better buying opportunities in the future.
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At time of publication, Manning had no positions in the stocks mentioned, although holdings can change at any time.
Mark Manning, AAMS, is an Accredited Asset Management Specialist and Registered Investment Advisor with Butler, Wick & Co., where he specializes in wealth management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Manning appreciates your feedback;
to send him an email.