Is the current market move real or not?
If it is real, how much higher can we go?
If it's merely a seductive trap, how hard will stocks, particularly the Nasdaq Composite Index, get hit this time?
These are three of the toughest questions I can think of, and struggling with the answers can make investing a nonevent. Here are my responses -- and if you've got better ones, I'm all ears. But please remember: Be polite. Thanks a lot.
Is the Current Market Move Real or Not?
I think the best way to answer this question is to look at the performance of the bond market -- specifically the ten-year note over the course of one year.
- The note is currently above both its 50- and 200-day moving averages (a plus)
- The 50-day moving average is trending upward (a plus)
- The 200-day moving average is flattening after a prolonged downtrend (a plus) and
- The note has put in a higher low (May 2000 vs. January 2000, a plus)
These four price-related factors, along with the fact that over the last week the note has embraced "softer" than expected economic data, says that the price of the note should continue to improve and the corresponding yield should weaken.
This activity is definitely a good sign for the market in general and financial-related shares in particular. And when financials perform well, it is like a having a veteran quarterback on the field steadying what would otherwise be an otherwise undisciplined offense. A close in yield under 6.2% would be an even better sign, and would suggest that rates will retreat to 5.8%.
If It Is Real, How High Can We Go?
Man, these are tough questions.
I think one of the least-favorite aspects of my job is putting a target on the major indices. I much prefer working with direction, because, as G.M. Loeb wrote in 1935 in
The Battle for Investment Survival, the primary factor in securing market profits lies in sensing the general trend.
Thus effort should be concentrated first on deciding the trend and next in seeking out the most responsive stocks. I certainly feel it is more feasible to try to follow profitably a trend upwards or downwards than to attempt to determine the price level...
I sure wish I had said that. But to answer my own question, I think it is likely the
works to 1500, the
Dow Jones Industrial Average
to 11,250, and
, the granddaddy of them all, to 3800. I had been looking for 3650 but it looks like that number is going to be conservative. I will definitely reassess when, and if, these short-term targets are hit, or if the environment changes from a 10-year note perspective.
If Merely a Seductive Trap, How Hard Will Stocks, Particularly the Nasdaq, Get Hit?
First off, stocks and markets have nothing to do with seduction.
does too. Yet, this is an important question and involves a lot of conceptualization. And if you've got time for conceptualization you haven't got time to look for bullish patterns.
I figure a good way to know will be to watch bellwether stocks like
. If GE is unable to break out to a new high and close above 56, then it is likely the current move higher is merely a window of opportunity and not something more important.
Likewise, if Cisco is unable to work above 70, I'll figure the same thing. Until then, I figure it is a good idea to use the window of opportunity wisely. Here are a few of my favorite patterns.
Automatic Data Processing
has a great pattern and is very close to breaking out. The stock showed impressive relative strength from March through late May and looks ready to achieve its promise.
Admittedly, relative action has fallen off in the last few days as other, sexier tech stocks have rallied, but Automatic Data is going to work. A very doable target for Automatic Data is 65. Full disclosure: I have recommended this stock to clients over the last week. Sell stop 51 3/4.
is another stock with a great pattern and is poised to break out to a new all-time high.
Like Automatic Data, Black Box showed notable relative strength, and good absolute performance too, from March through late May. It looks like it will be rewarded for this activity shortly. A reasonable target for Black Box is 96. The best sell stop, although a little wide and not at all reasonable from a reward/risk point-of-view, is 69 3/4. A shorter-term sell stop is 75.
is smoking. Since the March 9 low of 51 5/8 the stock is up 52%, is now at an all-time high, and looks like it could work higher still. 90 is a doable target.
However, there is one caveat -- often (I don't have any statistics on the following statement, I am just speaking anecdotally) stocks that run a long way to break out often stall shortly after making a new high. So, it is conceivable that DST could suffer a little profit-taking, but there's no denying the stock is bullish. Sell stop 73.
John Roque is the technical analyst at Arnhold & S. Bleichroeder, a New York-based investment brokerage firm specializing in Europe and the U.S., and a frequent guest on CNBC. At time of publication, Roque had no position in any of the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Roque appreciates your feedback at