Tale of the Tape
The Nasdaq this week pulled through its consolidated 2200 to 2200 area breaking that 2230 resistance level and moving over 2300. Amazing how seeing 2300 a few months ago caused nervousness, and now we see it as a bullish signal. Just more proof that the psychology of the market is what matters to us as traders as we learn to read the crowd and trade profitably with the minority. With the technical break of this level in the Nasdaq, it has joined the ranks of the S&P 500 and Dow that have also broken out in previous weeks. The question that stands now is if this is a headfake or an extension to the healing process for a continuation of a second half of the year Nasdaq market recovery.
In 1970 and 1990, we had similar occurances where activity picked up while the trend was still an underlying downward movement, thus constituting head fakes as we moved to new lows before resuming a stable uptrend. To be honest, there are so many cross currents in this environment that it is hard to gauge whether or not there is something right around to corner to rear its ugly head. GDP forecasts were revised lower as I expected from 2% to 1.3%. Corporate profits are still declining, employment figures are still deteriorating (Manpower Inc survey sharply lower signaling that 4.5% unemployment may not be the top as I targeted earlier), tech activity is still down, we have an extended capex and consumer cycle and global activity continues to be weak. If we separate tech problems and the economy, we have an economic outlook that shows the worst is behind us, but a continued weakening in tech activity that shows a drag in when the best will be seen.
For the positive side we have aggressive Fed easing ( I expect 25 bps in June and then we sit for a while), money acceleration including the liquidity component, spreads narrowed, yield curves steepened, tax cuts and stocks have shown technical breakouts in all major indices. Inflation is in check and won’t be a real worry, if any, until Q3 of 2002 as our GDP growth is to lead inflation by a year. If we can get by Q3 of this year without a negative GDP reading, I don’t expect us to show any negative readings and a mild recession to be the case in other indicators such as manufacturing. This would save us from the deep recession that was worrying people in Q1 of this year.
In the current period, we need to be careful of chasing rallies. I realize technical indicators are breaking out to the upside and doing well holding above those previous resistance levels. However, it feels to me that traders are trying to discount too much in this period of uncertainty and we aren’t close enough to the end of the tunnel to get aggressive with cash in the current period. The cross-currents in the market for strength and weakness demand a solid trading plan of not participating with the crowd, chasing rallies and feeling like you are missing something. The discounting of “the worst is behind us” has been done. If you didn’t participate with this rally, don’t let the “best has yet to come” phase of the market crush you by trading out of your plan because you are scared that you will miss something. The beauty about the market is that it always allows you a chance for re-entry. The minority know this and are able to trade their plan with patience and confidence. The majority plays the “buy high/sell low” game too often to want to join this crowd.
Be the minority!
Good Luck This Week.
Christopher Schumacher |
