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I trust you all had a wonderful Thanksgiving holiday. Many years of international business with extended time overseas taught me that we in the United States are truly fortunate. It is still the best country and the best economy in the world and most people in other countries would gladly trade places with us.

I’m actually writing this a couple of days early because of travel commitments in the latter part of the week. So if my market observations seem a day or two behind, that is the reason.

This week started off badly with major indices dropping sharply. The supposed catalyst was a poor holiday sales report from Wal-Mart. A drop in Wal-Mart sales does not surprise me. I hate shopping at Wal-Mart and will go almost anywhere else first to get what I need. The aisles are too crowded and the lines are too long. The convenience of being able to get almost anything one needs in one location is neutralized by the painful experience. Holiday shopping at Wal-Mart reminds me of the chariot race scene in the movie Ben Hur. I will gladly pay a little more somewhere else to avoid the unpleasant Wal-Mart experience. Many of my friends and neighbors express similar feelings and frustrations.

So I am not overly concerned by a slight slump in sales by the world’s largest retailer. I suspect that decline will be offset by higher sales numbers at other stores and by rising online sales. Based on early reports, that appears to be what is occurring.

Below is a chart of the Nasdaq. Monday’s sharp decline looks similar to the steep drop we saw at the end of October. The green line is a trend line showing the bottom of the current channel. Notice that the decline this week found support at that mark. The blue line marks the resistance level that the index finally broke through in November. That has now become a support level. So there is converging support for the Nasdaq at about 2370. It would be surprising to see the index break below that level.

The gold line is a 50-day moving average. During this rally that began in mid-summer, corrections have stayed well above that line. That is unusual and is one sign of a powerful bull trend. The bottom portion of the chart shows a moving average convergence divergence (MACD) and it is showing that market momentum remains strongly positive.

While it is certainly painful to watch the Nasdaq give back a big chunk of its November gains, for now this pullback appears completely normal. The time to be concerned would be if it breaks below that 50-day MA and that appears unlikely.
F.S.

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With many major indices at all-time highs and most of the rest at multi-year highs, many investors are faced with a dilemma. After being burned multiple times in the past, they were reluctant to jump back into the market when technical indicators turned positive back in August. Then after stocks advanced so strongly in September, they were hesitant to buy because it seemed stocks should be due for a correction and because October hasn’t always been the best month for stocks.

So here we are in November and stocks have rallied since mid-summer. Now these investors who are on the sidelines are wondering, “Is it too late for me to get in?”

The true answer is that no one knows.

Buying a stock position is like taking a small boat out on a large body of water. Conditions might seem perfect when you set sail, but a couple hours later unexpected high winds can have you in real peril. Of course, there are a number of precautions you can take to try to make sure the odds favor success. You can watch weather reports. You can wear a life preserver. You can stay close to shore.

We can do the same thing with investing. So if we assess the current situation, what do we see? Let’s use a chart to help us.

This chart shows the activity of the Nasdaq for 2006. For now, ignore the red letters and just look at the direction of the black line on the top portion of the chart. This shows that the price of the Nasdaq has moved up steadily since mid-July. That powerful uptrend with only minor pullbacks is all one needs to see to determine that this is a good time to buy. With that type of trend, all technical indicators will be positive. Is the rally about to end?

Since technical indicators primarily look backward, we need to consider fundamental indicators to get a better idea of what the market is likely to do in the near future. Right now, fundamental factors also appear positive. The economy is strong. Unemployment is very low. Interest rates are stable. Corporate earnings are generally quite strong. So fundamental factors are confirming that the advance should continue. Given the information we have right now, this is still probably a good time to buy.

Now let’s get to the nitty gritty of why so many investors always seem to buy and sell at the wrong times. Look at the chart again. It seems obvious that buying at point A and selling at point B would be smart. Unfortunately, none of us are that smart. Look at what the Nasdaq was doing prior to point A. There was no trend. It would have been virtually impossible to determine whether the next move would be up or down. Most investors trade based on emotion. In that case, point B would probably seem to be a better time to buy. At point B the index had been moving up for several weeks and had broken above its trading channel. However, an investor who bought at B would have quickly seen the trade turn against him and he probably would have bailed out somewhere around C or D, locking in a nice loss.

Now let’s consider how a simple technical tool can help us make better decisions on when to buy and sell. The bottom portion of the chart is a Moving Average Convergence Divergence (MACD). One way we can use this tool is to buy when the brown line crosses above zero and sell when it crosses below zero. Using that signal, we would have bought the Nasdaq at the beginning of 2006 and sold it in May at about point C, giving us a slight loss. However, we would have missed some of the losses that followed. The indicator told us to buy again in mid-August, and we would still be invested today after making a nice gain.

There are dozens of technical tools an investor can help use to determine better times to buy and sell. None of them are perfect. But almost all of them are better than relying on emotion or intuition. For example, an investor who buys at point E probably feels pretty good about his decision. The MACD turned positive a few days earlier and stocks have advanced nicely since. But immediately after this investor buys, the Nasdaq goes through six or seven losing sessions in a row. At that point the investor no doubt questioned his decision. But if he trusted the indicator and hung on, the index recovered and continued to advance.

Would you be brave enough to buy at point F? After several weeks of a strong advance, the Nasdaq stalled in mid-October. Then the Nasdaq saw a sharp drop. In hindsight, the pullback at F would have been a good time to jump in, because the Nasdaq has risen steeply since then. But few investors actually have the guts to buy when the market is falling.

One of Wall Streets oldest axioms is: Buy on weakness, sell on strength. When looking at a chart it makes perfect sense. But it is hard to put into practice when your stomach is churning and you are worried about being wrong. And when an investment is rising, our greedy nature makes it difficult for us to pull the plug, even if we will do so with a nice profit.

For most of us, short-term trades are almost doomed to be losses. Short-term redemption fees and restrictions mean individual investors need to look for trends of several months duration to be profitable. The current rally is the first real opportunity investors have seen since 2003.

Trends can help investors overcome mistakes. For example, the Nasdaq looked like it had formed a bottom in mid-June. But an investor who tried to get a jump on the MACD signal and bought too early at point D soon saw a quick gain turn into a loss. But if that investor were patient, it did not take long to erase that loss.

That brings us to another Wall Street axiom: Don’t fight the trend. In other words, even if you haven’t gotten invested yet, now is the time to take advantage of what the market is offering. Chances like this don’t come along often enough.

We obviously won’t have a report next week because of the Thanksgiving holiday. I hope you all have the opportunity to spend that time with family and friends. Have a great week and a great start to the holiday season.

F.S.

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Last week I wrote that I expected the Nasdaq to rebound from a few days of corrective action and resume its upward trend. That is exactly what occurred. In fact, this week the index broke through resistance and reached a new multi-year high. This is a strong signal of confirmation of the bull market that began in mid-summer. All of the major indices are now reaching new levels. Some, like the Dow, are at all-time highs.

The chart below shows the picture. This is essentially the same chart I used last week to show why I expected the rally to resume. The gold line is a 50-day moving average of the Nasdaq and you can see that the index never even corrected to that level. The green line is resistance from the year’s prior highs in April. After failing to close above that mark in October, the Nasdaq has now surpassed it. The bottom portion of the chart is a Moving Average Convergence Divergence (MACD). It shows an index gaining momentum after a brief downturn.

Virtually every market technical indicator is now strongly positive. This is the market equivalent of a sunny, 75 degree, windless spring day for golfers. For investors, this is probably the best situation that has existed since the early part of 2003 after which stocks staged an 11-month advance. In other words, if you are an investor, this is a time when you should be fully invested. Upward momentum is strong, meaning that overall market risk is low.

There has been one change in the markets that is worth noting. After outperforming the U.S. market for much of the past two years, international funds have lagged the U.S. for much of this recent rally. But that situation has shifted and over the past 60 days perhaps the strongest international market sector has been Latin America. As an example, during that time iShares MSCI - Mexico Index Fund (EWW) has gained nearly 17% compared to about 10% for the Nasdaq. Another fund we have mentioned often in past issues, iShares S&P Latin America 40 Index Fund (ILF), is up about 15% for the past two months. That chart below shows how these two funds have fared against the Nasdaq so far this year. ILF is the black line, EWW the blue, and the gold line is the Nasdaq.

The strongest U.S, market sector right now is biotech. The Amex Biotechnology 1Trust (FBT) is up more than 17% over the past eight weeks. Dyn Biotech & Genome PowerShare (PBE) has gained more than 13% in the same time.

Today the market pulled back slightly as traders and investors contemplated the impact of Democrats controlling Congress. But the reaction to the election results has really been quite mild–no doubt muted by the powerful technical underpinnings of this market.

F.S.

Editor’s Note: MarketOwl is a totally free publication. We hope you find the commentary interesting, insightful and valuable. If so, please encourage your friends and acquaintances to sign up.

A week ago I wrote about a fraudulent investment practice commonly known as a ponzi scheme. Today I need to give a market report because market activity over the past week has many investors worried. In other words, stocks have corrected the past few days and some folks are starting to panic.

About a half mile from my home is the base of a fairly significant mountain. It rises to more than 11,000 feet. Most of it is quite steep. I don’t know anyone who can hike from the bottom to the summit without taking some rest stops along the way. Since mid-August, major stock indices have been in a steep climb–perhaps too steep. What we’ve seen over the past few days is probably nothing more than a brief rest stop. For now, wailing and hair pulling is premature.

Below is a chart that provides a clear picture of the current situation. It shows the daily price activity of the Nasdaq. The gold line is a simple 50-day moving average (MA). Notice that the recent pullback has only brought the price about halfway back to that average. The green line is a trendline that has stopped all of the market’s minor corrections over the past three months. The bottom portion of the chart is a Relative Strength Index showing that the Nasdaq is still trending above the 50 level even with the recent downturn.

At this point, the market uptrend that began in August is still secure. Stocks cannot advance every single day anymore than I can climb a mountain without taking some (frequent) breathers. The current advance has been so strong that it would not be surprising to see stocks move sideways for much of November. But there certainly are no fundamental, economic or technical reasons for this correction to become more severe or prolonged. I am highly confident that major stock indices will end the year higher than the present level.

Right now the only thing that would cause me to be concerned about the continuation of this advance would be to see the indices break below their 50-day MAs. Otherwise it would take a significant unexpected event to derail stocks: A terrorist attack on a major oilfield or pipeline. An escalation of the war into Iran, etc.

A glace through the universe of exchange-traded funds shows that virtually all industry and market sectors are moving ahead over the past eight weeks. Those going in the opposite direction are exactly what one would expect during a strong bull market move: gold, oil and ETFs that short stock indices.

Strategis Financial Group has a unique strategy that invests in a basket of large cap stocks. The strategy manager uses a program of mathematical derivatives to identify stocks that are on the rise. As one would expect, the strategy has done very well during this rising market, but it got an even bigger boost this week when one of its holdings, American Power Conversion Corp. (APCC), was being bought out. The news propelled the stock price upward by about 30% in a single day.

Have a great weekend.