Insights & Advice

|

Don’t Fight the Tape

This week the stock market made it clear that the path of least resistance is higher. All three averages are now once again sporting gains for 2010 and it looks like we are on target to at least challenge the year’s highs from here.

It looks to me that we have had our dip and like several dips before it, the S&P 500 will return to the 1,150 level, which should happen sometime next week. Right now after six straight up days all three averages are overbought and prices are extended but that condition can last for some time. As I’ve said before, if the markets do pull back and you have money to invest, invest it.

Friday’s better than expected job report was the trigger that sent investors back into the market with renewed conviction that the economic recovery is on course. In addition, the Federal Reserve’s policy of low interest rates continues to provide a floor under the markets. In the meantime, debt-ridden Greece survived a crucial test when it raised $6.85 billion in a bond sale this week. Although analysts still believe there may be difficulties ahead, the successful bond auction puts much of the risk of sovereign debt default behind us.

Clearly, the good news on the economy continues to mount. Consumer spending has been the lynchpin of economic growth in this country since WWII. Given the drubbing the Man from Main Street has taken over the past two years, I am surprised that the consumer is managing to both save while beginning to spend a little in 2010. In the first two months of the year the consumer has begun to shop, despite February’s terrible snow storms, and from the data, appears willing to buy spring merchandise at almost full price. So after spending most of 2009 in the trenches, the consumer appears to be returning to a more normal spending pattern.

Given the data and this week’s market action, my overly-cautious stance that the markets might resume their decline and test the 1015 -1,035 range on the S&P was just plain wrong. I will bow to the tape every time and let the realities of the market dictate my next move. My mistake was not recognizing that the 10% decline we’ve had since the beginning of the year was about as deep a correction as we were going to get right now.

Still, better safe then sorry, I always say, especially after a 60% rise in the stock markets over the last year.
So now what? Obviously, we march higher, at least to 1,150 where the markets began their latest dip. That’s only 16 points away. It would appear logical that we have a bit of profit taking at that point. The S&P should continue higher after that, toward my next target of 1,200 on the Index. We may experience yet another dip that may be even deeper at that point. But we’ll worry about that when the time comes. For now, don’t fight the tape.

Posted in A Few Dollars More, At the Market