Flip Flop by Puru

You may recall that last autumn, I stated that the bear-market had ended and that a new cyclical bull-market had commenced. Back then, the entire world was gripped in fear and some of my readers felt that I had lost my mind. Well, the recent market action is supportive of my view and the rally of the past few days suggests that we are in the early stages of a cyclical bull-market.

As you are aware, a few weeks ago, we liquidated all our ‘long’ positions in stocks and commodities (except natural gas). This was a tactical move to protect capital as we were expecting some sort of correction after the strong rally off the March lows. Well, it looks as though the market is working off its overbought condition by simply consolidating sideways rather than declining in a decisive manner. This is extremely bullish and a sign that demand is returning at higher levels.

Look. We all know that the US economy is weak and there are immense problems in America’s housing market. However, in the business of investing, the markets usually lead the economy and the recent market action suggests that the bears are losing the battle. At this stage, I don’t really know why the market is rallying but the fact is that prices are trending higher. Furthermore, several other technical factors are also suggesting that we are indeed in the early stages of a cyclical bull-market.

Consider the below data:

• The VIX has now dropped below 30

• The LIBOR rate is below its long-term average

• New lows on the NYSE have shrunk to 2

• New highs have expanded to 40 – highest reading since October 2008

• Advance/decline line has broken out to a new high

• Credit spreads have narrowed considerably since last autumn

• Asian markets are leading the way with China at a new 52-week high

• Markets are rising on horrendous economic news – climbing the “wall of worry”

• Most people don’t trust this rally

Looking at the chart of the Dow Jones (Figure 1), it looks increasing likely that the bear-market low is now behind us. Note that the price has now climbed above both the 50-day and 200-day moving averages; something which didn’t occur throughout the bear-market. Moreover, the MACD indicator (bottom panel of the chart) has just turned bullish and this shows that the Dow is likely to go higher.

Figure 1: Dow Jones about to confirm bull-market?

For the moment, we are still maintaining a defensive investment position but we will re-invest capital in our preferred holdings in resources and emerging markets IF the Dow manages to close above 9,100. In doing so, the Dow will confirm the bull-market and we will ride the profitable trend over the following months.

My Comments: This seems like a fair analysis and it show that he has learned something important...deal with what is and not with what you think. Its okay to have opinions and convictions but have a plan when they turn out to be wrong.