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Solving the 2010 Stock Market Puzzle

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When the last piece is inserted, the picture looks like an angry bear.

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As you know, the stock market has been basically going sideways since early November. The S&P 500 has been swinging back and forth from 1086 to 1116 areas. This fifth trip down is near that key support area and right back on the rising 50-day moving average once again.

Bears will say this is a top forming, while the bulls are saying this is a nice base to launch to new cycle highs. This cloudy picture will be very clear when it's completed by a solid break either below 1080 or above 1120. If the market is going to break in favor of the bulls, it should be now due to the favorable seasonal tendency for the market to experience a nice "Santa Clause rally." If the market cracks significantly below 1086 in the last two weeks of December, then Santa Claus crashed and there will be no year-end presents for the bulls. If we rip above 1120, then Santa will just have added more coal to the bears' already full stockings.

Let's try to put all the biggest pieces of the market puzzle together to see what the completed puzzle will look like.

The first puzzle piece is the new low numbers of stock market bears. A recent Charles Schwab investor survey showed bears are below 15%, which is lower than the record low number of bulls at the March 2009 bottom.

The second puzzle piece is the current weakness in the stocks that were market leaders on the way up, the banks have topped and are weakening, and crude oil had a serious reversal from its recent highs. Finally, gold and gold stocks have been a major market leader and are now experiencing a decent-sized correction.

Another puzzle piece is that foreign markets like Portugal, Ireland, Italy, Greece, and Spain are all rolling over, giving us the indication that these "PIIGS" are about to get slaughtered. All governments with giant budget deficits are pigs for spending too much money and going into too much debt. Remember, bulls made money in 2009 after the bears made money in 2008, but piggy governments that run out-of-control deficits will get slaughtered in the years to come.

A rising US dollar is another puzzle piece for the bears, because there's been a near-perfect inverse correlation between the dollar and the stock market. A rising dollar could mean that investors expect rates to rise sooner than the majority now expect.

The four lower RSI readings on new higher highs in the Dow Jones Industrial Average are each pieces to the bearish puzzle. August 4, September 18, October 15, and December 14 all saw new DJIA highs with lower relative strength readings on the daily chart, and with each new low reading the puzzle picture becomes clearer.

Another piece of the puzzle is the rising bearish wedge pattern in the stock market. This wedge looks very similar to the rising wedge of 2007 just prior to the 54% market plunge. The market is now at the edge of the wedge and a break below 1080 will be like a boulder rolling down from a high mountain peak.

The final missing piece is the biggest puzzle piece for my partner Denny Lamson and I, and that's a Grail sell signal on the market. That signal may not come until after the market has one final high like the one it experienced in October 2007. Once we get that sell signal, it will complete the market puzzle for us. Once that final piece is inserted, the puzzle picture will look like a giant angry bear for 2010. At that time, volatility will again explode and it will be time to ride the next big moves both down and then back up as 2010 leaves its mark on the economy and psyche of stock market investors.

I urge everyone who wants help riding the next big trend when that final missing piece falls firmly into place, to subscribe to the Minyanville Grail ETF & Equity timing program.

For more from Ron Coby, check out Minyanville's newly launched Grail ETF & Equity Investor newsletter written by Ron Coby and Denny Lamson using their proprietary Lamson Grail Timing Indicator. One recent trade just closed +22% in just one month! Sign up today for a FREE 14-day trial. Learn more.
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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