Critical Juncture for Technical Analysts
NEW YORK (
) -- Believers in technical analysis see some bullish trends for stocks in the short term, but are divided over to how retail investors should approach the market at a critical juncture.
After Thursday's 1% jump, the
S&P 500
has now run into overhead resistance at the 1044 level. That also puts the index 70 points above its nearest support level. If the S&P 500 were to break higher through resistance, it could continue to blaze a trail higher. On the other hand, a failure to do so could mean a drop below the 975-level if selling accelerates.
It's no surprise, then, that retail investors are divided on where the market will be six months from now. The
American Association of Individual Investors'
sentiment survey, which measures the percentage of individual investors who are bullish, bearish and neutral on the stock market for the next six months, has been mixed over the last month, with bearish responses edging neutral or bullish opinions three of the last four weeks.
"Don't forget, the retail investor is usually wrong when it comes to the market," says Ryan Detrick, senior technical analyst with Schaeffer's Investment Research. "Unfortunately, if you follow the sentiment survey by the AAII, it appears your average retail investor has been on the wrong side of this entire rally."
Some market analysts argue that there is little evidence that suggests the average retail investor has even started participating in the recent rally. "To me, the plunge from late last year until March was hedge funds panicking out and most of the rally since was hedge funds reversing their shorts," said Phillip Roth, chief technical market analyst with Miller Tabak. "That's a very professional trading market. Retail investors are just not participating."
There is good news for those who haven't moved money in off the sidelines yet. Schaeffer's Detrick argues that to have seen a greater than 50% rally from the lows and the retail investor still doubting the rally gives him confidence that this rally still has legs.
Miller Tabak's Roth argues that there is no top yet in the short run. "People have been trying to pick a top for two months. When that kind of attitude prevails, it usually means the market is going to press higher to punish the bears," he said.
It seems, then, that market analysts are in agreement that the market is set to climb even higher. The divergence in the opinion comes on how to act now. While all signs are suggesting that the uptrend will remain in place over the short term, Paul Mendelsohn, chief investment strategist with Windham Financial says the market is too extended here at resistance levels.
"That doesn't mean we can't go up. It just means the more we go up, the higher the risk becomes," Mendelsohn says. His simple short-term solution for cautious investors: Do nothing.
"Put your hands on your chair and sit on them," says Mendelsohn. "Do absolutely nothing. When you get to these critical junctures, these are the times to become a little more cautious because the risk is much higher than the potential reward. You're pretty overbought up here. Is it really worth trying to pick up that last bit of the run with the risk below us? To go chasing this close to a resistance point is a fool's error."
As many are quick to point out, September is historically a weak month for equities. In Septembers over the previous decade, the S&P 500 has lost ground six times for an average of about 75 points. By comparison, during the four years the S&P rose in September, gains averaged only 25 points. While it's not a certainty the market will end lower this September, some argue it is still too risky to buy in here with limited upside over the short term, especially with the market at its 2009 peak and its highest level in 11 months.
That's not to say that another market collapse is a sure thing, either. But the possibility exists where the market fails to take out the resistance here, it pulls back and breaks the 50-day moving average and then falls below the trend line. "Then it gets ugly. That's really a critical support level," Mendelsohn says. "What if we pull back to the 50-day moving average and you break down from there. We're in a time of the year where you have to be careful."
Schaeffer's Detrick agrees that volume has been light and that we are in the historically weak time for the market. But he counters that all dips have been bought "and we expect this trend to continue."
Even if Mendelsohn is being overly cautious, that doesn't mean that there aren't stocks to buy. "There are stocks out there to buy, but you have to pick your stocks very carefully," he said. Miller Tabak's Roth agrees, encouraging traders to find ways to participate on the long side.
"If he or she is a patient investor, there will be several setbacks between now and next spring, so there is no need to rush," Roth added. "But if I truly had a long-term view investor and I wasn't buried in big losing positions, I would try to start moving my portfolio to where I wanted to be for the next few years. If you're a trader, then it's a different story. You have to take your shot with a stop and try something."
Looking out to December, Mendelsohn said he is buying stocks that are basing and haven't taken off yet. "Would I buy an S&P 500 index here? Would I buy a
Nasdaq
ETF here? Not on your life," he said. "There are stocks you can buy here with very little risk."
Roth is more specific with his selections. "If the market is going to go up at all, it's going to go up because people believe in global growth, so those are the kind of stock you want to buy," he said. "Basic materials, energy, and the associated industrials and transportation stocks will benefit from global growth, so that's what you want to buy."
--
Written by Robert Holmes in New York
.
