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The Beginning of the Bottom?


Clear strength in some sectors - but hope must be balanced with reality.

After a 3-week hiatus from active trading, the longest in my 13 years in this business, it feels good to be back from a trip that was of significant personal importance to me. It'll take me a couple of days to get back fully in sync with the market, however.

Meanwhile, for what it's worth, I learned that real estate isn't moving much in one of the most populous BRIC nations, India. In my discussions with investment professionals, the recurring theme was that construction on many projects has been stopped well before completion, and I witnessed many such projects firsthand. The building boom that the world enjoyed was evident in India up until Sept 2008, but for the first time in several years, people are walking away from real estate contracts and their committed down-payments.

The social mood there has always favored saving over conspicuous consumption, but now the newly adopted habit of consumption definitely seems to be on hold. It's an eerie sense of anxiety and uncertainty with a lack of visibility into the future that most people are not accustomed to.

Let's take a moment to talk about US markets. For that, I would like to highlight a small excerpt from a lengthy note on Google (GOOG) on March 31:

"The 200-day moving average currently lies around $382. GOOG is very close to this significant milestone. My experience has shown me that when price gets close to any major milestone like this, it very often touches it before retreating. (Ever wonder why the finish line on the running track is clearly marked with flags?)

"Case in point: Recent price activity in the chart of Goldman Sachs (GS)

Employing the same thought to major market indexes, here are some that are near an important milestone. Semis (SMH), retail (RTH), and housing (XHB) have either visited or are very close to their 200-day moving averages.


Click here to enlarge.


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However, the major market indexes such as the S&P 500, Dow Industrials, Russell 2000 and the NASDAQ are still far from their respective 200-dma's.

Here's the Dow Industrials, for example.

Dow 30

Click here to enlarge.

The media has been branding the strength in select sectors coupled with a meteoric rise in major market indexes as the beginning of the new bull market. However, as I discussed in the Bull Market Timer, while strength in these sectors is an essential precursor to the bottoming process, it is a necessary but not a sufficient condition for the launch of the new bull market.

So, while we should guiltlessly enjoy this bounce, as I discussed on March 2, it's always a good idea to balance expectations with reality.
No positions in stocks mentioned.

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