The Big Picture
Friday, May 18, 2001
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How Signs Of Bear's End Showed Up
Investor's Business Daily
“Stocks Up, Investors Hope Bottom Is Near,” flashed a headline to a wire story Thursday.
The first part was right. The Dow industrials, S&P 500 and Nasdaq composite all climbed. But the second thought missed the mark. It’s a common misconception these days.
Anyone who’s been reading this page and following the market averages and leading stocks knows the stock market changed direction on April 10.
But few folks on Wall Street consistently analyze the market correctly. The majority of investors ultimately — and unnecessarily — pay the price.
For many readers, the comments, curves and lines on the charts on IBD's General Market & Sectors page are well-understood. Even as the economic and profit news seemed dismal over the past six weeks, the market was telling a different story.
Understanding the market takes practice. It’s hard to block out the conventional wisdom and focus on what really matters. IBD will keep these key observations on the charts for the next few weeks.
If you’re new to analyzing the market, you can take the time to study how the latest bottom emerged. Individual stocks and the broader market simply reflect the emotions of investors. Human nature doesn’t change much, which is why the lessons from one cycle hold true for the next.
In the beginning of April, the market had been falling for more than a year. The speculative bubble in tech stocks and a slack economy conspired to beat the market into submission — even as the Fed feverishly cut interest rates. Some investors couldn’t take it anymore. They either walked away or placed bets the market could only go lower.
As fear was peaking, stocks started to rally. Four to five days later, the Nasdaq, S&P 500 and Dow all followed through with gains greater than 2%. Volume was not only higher than the previous day, it was above average. That was your primary indicator the bear market was over.
Additional follow-through confirmations occurred over the next week or so. Even better, institutional-quality stocks began to break out of sound price bases and trade higher. That was another key signal the rally was for real.
The emerging small- and mid-cap leaders don’t pack the punch of the wild techs of recent years. But they’re acting strong and reflect a more normal bull market. This market is rewarding good stock-picking and disciplined trading.
The market averages also have traced bullish cup-with-handle bases. While the Nasdaq continues to work on its breakout, the Dow and S&P popped out Wednesday. The formation is more common among individual stocks. But it can be just as powerful for the major indexes. It’s another confirmation that a new bull market has pushed aside the worst bear market in more than a generation.
Looking for more signs of the shift? Check out the Value Funds Vs. Growth Funds chart. It shows how richly valued tech stocks have given way to names with lower price-earnings ratios. Short interest increased even as the market rallied, a bullish sign that the crowd still didn’t believe. And the advance/decline line broke a downtrend right at the market bottom and continues to head higher. |
