I don’t really enjoy amusement park rides. The truth is, they scare me to death–not just the triple-loop, vertical plunge rides either. One of the rides that frightens me most is a pirate ship that swings back and forth like a pendulum. My wife and children are quite amused by this particular fear because they view the ride as nothing more than a giant swingset. They always choose the seats at the ends of the ship becaudse they swing the farthest and people in these seats get the wildest ride. I prefer the middle seats where the ride is less thrilling and I can be the first one off when the ship stops.

If I stand to the side and watch, the ride looks like it would be fun and not frightening even to me. Everyone seems to enjoy it and it only lasts three or four minutes. But once I am aboard and the ride starts, I find the sensation extremely unpleasant. The experience seems to drag on three or four times as long as I expect. So while I’ll still do an occassional mild roller coaster, a water ride or the spinning teacups, the pirate swing is out.

I make this highly personal revelation because I suspect many short-cycle index investors have experienced similar feelings over the past several weeks. During the past two months, stocks have traded in an extremely narrow trading range. This is by far the most difficult possible situation for any investor or trader to make a profit.

I’ve included a chart below to illustrate the situation. This is the Nasdaq and the area between the two blue lines is the channel that has persisted since mid-January. There is less than a 3% varience between the top and the bottom. This is a candlestick chart. The red vertical bars are down days and the open vertical bars are days when the Nasdaq gained. Notice that within the period between the blue lines, there essentially is no period where a trend can be identified. This is why it is so difficult to make money even for someone doing short-term trading. Anyone trying to trade the Nasdaq short cycles during this time has undoubtedly been whipsawed. So even though the trading range has been less than 3%, there is a sensation of lots of volatility. This would create a feeling that is the investment equivalent of my pirate swing experience.

The green circle outlines the only short-term trend of this three-month period. In early January the Nasdaq strung together seven positive days. That provided the only legitimate profitable trading opportunity of this period. The bottom portion of the chart is a Relative Strength Index (RSI). Some investors use this as a trading tool. They buy when the index rises above the 50 mark and sell when it drops below. Notice that this system would have produced several whipsaw trades since mid-January. In fact, I reviewed several different trading systems that all struggled with whipsaws during this time.

Normally, I make no attempt to forecast what the markets will do because there are too many unpredictable factors. I generally look for sectors and markets that are in long-term trends and try to take advantage of favorable situations. But if I were forced to make a prediction today, I would say that the market is about to break out through the top of this trading channel and we are likely to see at least a short-term market advance.

Here are some of the reasons I believe the next move will be bullish rather than bearish:

1. There are just two weeks left in the first quarter. Traders and institutional money managers always like to end the quarter on a high note. They are going to be doing all they can the next two weeks to prop up the market averages so their clients see positive returns on their first-quarter statements.
2. Technical indicators are generally positive. Relative strength, up/down and new high versus new low ratios, momentum indicators and others are showing that this market has the strength to advance.
3. The intermediate cycle for the Nasdaq has generally been negative for eight weeks. Usually when an index moves sideways during a negative cycle, that is a sign of underlying strength. The cycle just turned positive again.
4. Economic fundamentals look good. The latest CPI shows that inflation is still no threat. Unemplyment numbers are good. First-quarter GDP growth is going to be strong. Energy prices remain high, but appear fairly stable.
5. Bearish sentiment. The latest American Association of Individual Investors weekly survey showed that more than 60% were bearish or neutral. This is a contrarian indicator. Simply put, the majority of individual investors are usually wrong. If everyone thinks the market is going to decline, it probably is going up.

In fairness, I could also come up with legitimate reasons that the market’s next move will be down. But my overall impression is that there are more positives than negatives right now. Of course, there is no guarantee that I am right. Often I am not. In general, though, I feel more like I am just getting off the pirate ship swing than like I am about to get on.

Have a great weekend. I’m looking forward to the start of spring on Monday. We haven’t seen many hints of spring so far in March but I know it can’t be far off.