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Why Stocks Are Ignoring All Reliable Market Indicators, and How to Trade Anyway


Consider this: Stocks are actually cheaper now than they were in 2007.

Still, stocks have turned a deaf ear to such tried and true indictors as the Dow Jones Transportation Average (INDEXDJX:DJT), the S&P Equal Weight Index (NYSEARCA:RSP), the S&P 400 MidCap (NYSEARCA:MDYV), S&P 600 SmallCap (NYSEARCA:SLY), Russell 2000 (INDEXRUSSELL:RUT), and the Value Line Arithmetic Index each made new all-time highs last week. Indeed, it is only the Dow Jones Industrial Average (INDEXDJX:.DJI) and the S&P 500 that have as of yet failed to make a new all-time high, having stalled at their upper trend lines. That could be viewed as an upside non-confirmation, but even if it does lead to the 5% - 7% pullback I have wrong-footedly been looking for, any correction is likely to be shallow and short. The reason is pretty simple.

Consider this: Stocks are actually cheaper now than they were in 2007. Verily, both forward and trailing price-to-earnings ratios for US companies are lower currently than they were in October 2007 by 11% to 13%. Further, the quality of those earnings is better, and the sustainability of future earnings is much stronger, than in 2007. Additionally, the financial sector is much healthier than it was heading into 2008, which should continue to drive the real estate recovery.

Nevertheless, if I am going to err here it is going to be using the indicators that have worked over the last 42 years, and regrettably they are still in a cautionary mode. That does not mean we have not been buying stocks, but it does mean we have tried to buy risk-adjusted stocks where the downside appears contained and the fundamentals suggest the upside is decent.

The call for this week: Last week, the SPX made it seven weeks in a row on the upside. According to my notes, this is the first time in 42 years that has happened at the beginning of the year. Obviously the driver has been liquidity and continuing decent earnings whereby 63.6% of reporting companies have beaten estimates and 64% have beaten revenue estimates for the best "beat rate" since 4Q10. Clearly, I have been too cautious for the past few weeks, but in this business better to "lose face and save skin." One place that quote pertained to last week was gold, which I thought would "hold" in the $1620 - $1640 support zone. With last Friday's close of $1610.60 (April future) obviously that "call" was wrong and as always the first loss is the best loss; or as my father says, "If you are going to be wrong, be wrong quickly with a de minimis loss of capital."

Jesse Livermore's Trading Rules Written in 1940

1. Nothing new ever occurs in the business of speculating or investing in securities and commodities.

2. Money cannot consistently be made trading every day or every week during the year.

3. Don't trust your own opinion and back your judgment until the action of the market itself confirms your opinion.

4. Markets are never wrong – opinions often are.

5. The real money made in speculating has been in commitments showing in profit right from the start.

6. At long as a stock is acting right, and the market is right, do not be in a hurry to take profits.

7. One should never permit speculative ventures to run into investments.

8.The money lost by speculation alone is small compared with the gigantic sums lost by so-called investors who have let their investments ride.

9. Never buy a stock because it has had a big decline from its previous high.

10. Never sell a stock because it seems high-priced.

11. I become a buyer as soon as a stock makes a new high on its movement after having had a normal reaction.

12. Never average losses.

13. The human side of every person is the greatest enemy of the average investor or speculator.

14. Wishful thinking must be banished.

15. Big movements take time to develop.

16. It is not good to be too curious about all the reasons behind price movements.

17. It is much easier to watch a few than many.

18. If you cannot make money out of the leading active issues, you are not going to make money out of the stock market as a whole.

19. The leaders of today may not be the leaders of two years from now.

20. Do not become completely bearish or bullish on the whole market because one stock in some particular group has plainly reversed its course from the general trend.

21. Few people ever make money on tips. Beware of inside information. If there was easy money lying around, no one would be forcing it into your pocket.

See also: 10 Things You Need to Know for Tuesday

No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
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