Readers of the
may have viewed some of my past columns that have appeared here several days after they initially ran on the subscription site
, but now I'm excited to announce that I'll be writing one all-new weekly column on Fridays for
My goal is to use both fundamental and technical analysis to keep investors abreast of the market, the leading sectors and industries, and individual stocks that deserve watching. My philosophy revolves around analyzing economic and business cycles, which in turn affect the market. Those effects are than filtered down through specific sectors, industries and finally, stocks.
Next I look at the catalysts in the market that are likely to propel those industries and stocks higher or lower in the intermediate to long term. My intermediate-term outlook represents several weeks to several months, and long term is several months to years.
Finally, I combine fundamentals (looking at the earnings, sales, debt and so forth), technicals (the trend of the price on charts) and sentiment data to find the best possible investment ideas that offer the highest potential reward with the lowest level of risk.
Sentiment data are very important indicators, because they are psychological in nature, and they try to measure the degree of bearishness or bullishness in the market. Sentiment indicators are contrary indicators and are used the same way as overbought or oversold indicators.
Today to kick off the first column, we are going to take a look at the
to see where they might be headed over the next few weeks. The reason it is important to pay attention to the major indices is that four out of five stocks will eventually follow the direction of the major market averages. So we don't want to get caught being aggressive when we actually should be more cautious.
Currently, the investing public and the media are quite bullish, because many believe that the financial debacle is over, that the housing market is bottoming and that the chance of a major recession is weakening. This positive outlook is happening as the major indices are hitting major resistance levels.
Resistance levels are areas on a chart where investors have previously bought up to and then stopped. When a resistance level is reached, an index or a stock can start to slide, causing substantial losses. These levels can be difficult to get through, and indeed it can take several tries before resistance is broken. But for investors who are serious about their money, they need to be aware of the charts along with fundamental data.
So today we're going to take a technical look and see what the charts are pointing to going forward.
Overall, the market still has plenty of resistance to eat through. For example, the S&P 500 and Nasdaq fell 20% and 25%, respectively, from their October 2007 peaks to their March lows. That created considerable damage, which means we could see quite a bit of volatility in the near future.
The chart below shows that the S&P 500 has moved up almost 12% since the March low. Currently, it is testing the resistance levels that have been created over the past year. You can see those levels from the yellow trend lines that I've drawn on the chart. The lower one shows where support was back in August and November. That support turned into resistance when the market broke below those levels.
After the recent move, it is likely we will see some type of correction that can begin anywhere between the 1400 and 1450 level. The key that investors will want to see is for any correction to hold above 1350 on the chart. Otherwise, we could possibly visit or break the March lows.
The Nasdaq Composite had another good day Thursday and is now almost 17% above its March low. That takes the index almost back to where it started at the beginning of the year. It has now entered into the 2500 to 2600 zone where there is heavy overhead resistance.
That leads me to believe we will likely see some type of correction before we move higher. A normal correction would probably take the index down to the 2300-2400 level. A break below that would also probably take us down to test the March lows.
I often use the percentage of stocks above the 40-day moving average, as measured by the T2108, as an oversold/overbought indicator. When the green line moves up toward 75, it usually signals that the market is extended and is in for some type of corrective action. The extreme levels that you see from 2002 to 2008 have often signaled important bottoms and significant tops.
Currently, you can see that the indicator is in the upper range where the risk in the market dramatically increases. This does not mean that you should run out and sell all of your holdings, it just tells investors that the risks are rising, and it may be a good time to take some profits.
In the short term, there's a lot of optimism floating around the market, but a lot of stocks are extremely extended to the upside. That means there is a higher probability that we will see some type of correction in the near future.
Longer-term individual stocks have been acting fairly well along with new leaders emerging in recent weeks. I would like to see more sectors participating than just the commodities and technology groups. However, the long-term picture continues to remain encouraging.
At time of publication, Manning had no positions in 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;
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