Thursday, July 23, 2009

Lift-off...for now

A major, glaringly obvious Dow Theory confirmation today by both the Dow and the Transports. The Dow took out its most recent highest high (8,799 on June 12) to close at 9,069. The Transports surpassed their previous high (3,399 on June 11) to close at 3,506. This represents a strong 38.5% rise from the March lows. Richard Russell took the bear off his site today and replaced it with a bull. The growing chorus is that this market is going higher, time to leverage in.

There is no more forceful kind of Dow Theory confirmation than when both averages exceed their previous highs on the same day. That's what happened today. The next target level is probably 9,600 for the Dow. Above that we're looking at over 11,000.

But, let's not get ahead of ourselves. Russell still points out on his site tonight that this is probably not a new bull market. He doubts that a 27-year (1982-2007) bull market can be "corrected" by a two-year bear market.
There's a good chance the Great Recession isn't over yet.

From a purely technical perspective, the
RSI on the Dow is at a very high 71. Rarely does the market continue to rise without at least a temporary pause when such
an important technical indicator is starting to say "overvalued". My personal feeling is that a breather is coming soon. Most likely, the rise will continue after some sort of brief interruption.

Be that as it may, I can breathe a sigh of relief (after sweating bullets) that my
DIA position (which is now larger than 15% of my portfolio) is making money after such a disastrous bear market drop. I may find the Great Recession historically stimulating but I'd really rather make money.

Nevertheless, I don't plan to get too greedy. A fellow manager at work sent me a "freebie" tip from
Jeff Cooper, who seems to often agree with what I read from Richard Russell, but who uses the S&P as his basis for analysis. Cooper also offers a great deal more technical analysis - in that regard he's more like Jack Schannep. Anyway, Cooper's piece today is entitled "Seven Reasons Not to Trust the Bull Market." Fascinating stuff.

Cooper has been amazing in his accuracy this year. He predicted the March lows back in January. He predicted another low later this year. Presently, his position seems to be that we could have a "blow-off" bear-market rally where the averages really get out of hand (the S&P may top 1,100, for example). If that happens there could well be
another drastic downturn.

That would be consistent with what Russell says happened during the 1966-1974 bear market. Several tempting bull rallies occurred but each was always a disappointment. I think that's what is shaping up this time.
Buy-and-hold has worked out just fine through the recent swoon - by the skin of my teeth. I plan to sell before October.

Amazing how quickly that beach vacation wore off.

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