Thought this made some sense....
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Walker Market Letter
October 31st, 2002
lowrisk.com
Since our last update two weeks ago, the market has mostly
churned sideways in a relatively narrow range. On the SP500,
that range has been defined by 867 on the bottom and 907 on
the top. The range is a little less well defined on the Dow,
but it is basically between 8200 and 8550. And on the Nasdaq
composite the range is 1280 and 1350.
On all those indexes we have had some powerful moves in the
past couple of weeks... both up and down. But the moves have
been contained within those trading ranges. At times we have
moved from one end of the range to the other in a matter of
hours, but the runs have never been powerful enough to break
out of the ranges.
As many of you know, in addition to our market timing work
with the Walker Market Letter and the Walker MarketEdge, we
also spend a lot of time looking at the market on a very
short term trading basis. One pattern that we often see on
the very short term after a big rally day is what we call
"backing and filling". That is basically a time when the
market digests its gains by moving sideways for a day or
two.
The type of trading we have seen in the last two weeks has
basically been a larger, longer term version of "backing and
filling". After the market made new multi-year lows on
October 10th, we saw a very powerful rally that lasted about
seven or eight trading days. Given the size of the gains in
that explosive rally (from high to low, the SP500 gained
18.1% and the Nasdaq composite gained 21.5%), a period of
"backing and filling" is not surprising.
( If you are interested in our short term trading
work, take a look at: <http://lowrisk.com/rbi.htm>.
We have an unlimited free trial. )
Of course, the big question now is which way will the market
break out of its two week old trading range. As is often the
case, there are compelling arguments on both sides of the
fence...
In the rally from the October 10th low, the market became
extremely overbought. I have discussed this concept of
"overbought" and "oversold" before... think of a rubber
band that gets very stretched out in one direction. It
becomes harder and harder to pull it in that direction.
And it becomes easier and easier for it to snap back in the
opposite direction. When the market is "overbought", the
rubber band has been stretched out on the buy side as the
market has rallied. It gets harder and harder to continue
rallying, and the market is setup for a pullback.
In this case, however, the market didn't snap back lower
when it became very overbought. Instead, the market was able
to work off those overbought conditions by moving sideways
for two weeks. And not selling off in the face of extreme
overbought conditions is a big positive for the bulls.
On the other hand, there is no way that this market is going
to just blast off relentlessly higher without *any*
pullbacks at all. That might have been the way the market
acted from 1995 through 2000, but we have just had nearly
three years of a brutal bear market. The market will not
just blast off and leave those October lows behind as if
they were a bad dream... there are too many investors who
were burned too badly by the bear market. It will take more
than a couple of weeks of rallying to put the bear market
behind us.
So that is sort of where we are at... the market is acting
well, but I think it is overdue for a quick two or three day
pullback. We are going to get that pullback sooner or
later, and when it comes, it will tell us a lot about this
market. If the selling is well contained and only lasts
two or three days, then the bulls may finally get a long
overdue extended rally.
When our model tells us it is time to go back into the stock
market, we will send out a Flash Update to our Walker
MarketEdge (WME) subscribers. That is one of the benefits
that you get when you upgrade to WME. Another big benefit is
our mutual fund picks, which have been outperforming the
market since we introduced them in January 2000. If you are
ready to upgrade to WME, or if you would simply like to
learn more about it, take a look here:
> > > lowrisk.com < < <
Good Luck,
Jeff
Copyright (c) 2002 by Jeff Walker, Bayfield, CO. This
newsletter may be forwarded, as long as you do so in its
entirety. |
