Market volatility has been high over the past couple of months, but in spite of that there has been a decent recovery. Now the key is trying to figure out whether this recovery has enough strength to become a new uptrend or if it will soon fizzle as the bears maintain control.

Market technicians like to measure extremes in the belief that if they can determine when the pendulum has reached its widest arc, a change in direction is inevitable. Market professionals refer to these extreme conditions as “overbought” or “oversold.” In other words, when a buying cycle peaks because of pent up demand (or irrational exuberance) then the market is considered to be overbought and a downward correction is likely. Conversely, when an abundance of selling pressure has driven the market to the bottom of a cycle, analysts describe that situation as oversold and start looking for a rebound.

The chart below shows the Nasdaq over the past three years. It is easy to see the significant downturn that began in October and the recent rally. Since bottoming at the beginning of March, the Nasdaq has gained about 9%. In other words, it has recovered about a fourth of the loss it incurred from the peak to the bottom.

The red line highlights the nice upward trend that began in August 2006. Notice that the recent downturn easily took out that trend and erased most of the gains made in the ensuring 15 months. You can also clearly see the corrections that occurred in the midst of the uptrend. They tended to last just two or three months. These fairly regular market patterns are intermediate cycles.

The gold line is a simple 50-day moving average of the Nasdaq. You can see that the index finally broke solidly above the average again earlier this month.

The bottom portion of the chart is a moving average convergence divergence (MACD). This tool is specifically created to identify the overbought and oversold market periods. In February it was showing that the Nasdaq was very oversold and due for a rebound, which began a couple of week later. Based on the MACD, this latest upward move has another week or two to go before the Nasdaq is again overbought.

In this instance, the most recent corrective cycle has been much longer and steeper than any others we see on the chart. If a new bear market is in place, then we will likely see another downleg begin in the next two to four weeks.

Of course, as I’ve explained many times in the past, I certainly don’t claim to have any special abilities to predict market movement and I am regularly surprised by how the market behaves. But the combination of current negative economic and fundamental factors make it seem that the start of a new bull market is unlikely right now.
F.S.

If you would like investment strategies that attempt to minimize risk but still provide the opportunity for solid growth, check out the offerings from Strategis Financial Group. For information, call 800-279-3377.

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If you had invested in the Nasdaq or a Nasdaq index fund two years ago and held that position until today, your return would be zero. There have been substantial up and down moves during that period, but the net result is that you would have no more money today than you had to start with.

That is not the type of result one wants from an investment. The problem is what can an investor do when the markets are in a downturn? I’ve pointed out numerous times in recent weeks that very few economic sectors are progressing right now. That makes it difficult for investors to avoid losing money, let alone to generate any profits.

Several fund companies introduced short funds to provide a profit alternative to investors in bear markets. But many of these funds do not provide the true inverse relationship they try to achieve. And because short funds can be quite volatile, it is difficult for many investors to make good decisions about when to buy and when to sell.

On the chart below, the Nasdaq is shown as a gold line. Notice that it dropped more than 20% from its high point. Last summer Strategis Financial Group switched many client accounts to bonds (blue line). Bonds have performed very well since then and are up about 10%. But in recent weeks even bonds have moved to a sideways pattern.

The black line on this chart is a mutual fund called Permanent Portfolio and it is one of the holdings in our Foundation strategy. The fund invests a fixed target percentage of its assets in the following investment categories: gold, silver, Swiss franc assets, dollar assets like treasury securities and short term corporate bonds, etc. It is listed in the conservative category by Morningstar and is a five-star ranked fund over one, three, five and 10-year periods.

This is one of a very small number of funds that has not seen a significant pullback during this latest correction. It has continued to advance even as bonds have moved sideways in recent sessions. The fund has been managed by Michael J. Cuggino since 1991.

If you are looking for a low risk fund for an IRA or other investment portfolio, this is one you might want to consider.
F.S.

If you would like investment strategies that attempt to minimize risk but still provide the opportunity for solid growth, check out the offerings from Strategis Financial Group.  For information, call 800-279-3377.

You requested this MarketOwl free e-newsletter. Please add support@marketowl.com to your e-mail address book to ensure prompt delivery.

There is a group of market analysts who believe that overall market performance is largely tied to a presidential cycle. In other words, how Wall Street acts is based on whether it is the first, second, third or fourth year of a president’s term. If you would like to find out more about it, do an Internet search for information on the “presidential cycle theory” and you can find all sorts of information.

I don’t totally buy into the idea of a rigid presidential cycle, but certainly the selection of a president is a significant worldwide event. As such, it can have a major impact on the financial markets.

One thing Wall Street and the financial markets dislike is political and economic uncertainty and a presidential election has the potential to produce plenty of both. The last time the U.S. had a presidential election without an incumbent was in 2000, when George Bush was campaigning Al Gore. If you remember, it was a very close race and the outcome wasn’t fully decided until several days after the November vote.

Below is a chart of the Dow Jones Industrials Average over the past decade. You can see that the market sold off sharply in early 2000 while the campaign was in full swing. For the rest of the year the markets seesawed. Of course there were many things taking place and it would be inaccurate to attribute all of the volatility to the election, but certainly it played a major role.

Of course the Dow was the most stable of the major indices. A chart of the Nasdaq or the S&P 500 during this time would show much greater volatility.

Interestingly, with all the trouble in the real estate sector and with the price of oil at all-time records, the sell-off we have seen since the end of October is comparable to what occurred in the first quarter of 2000. And once again, we are facing a presidential election where there is no clear-cut favorite. Just as events in 2000 produced major market swings leading up to the election, I would not be surprised to see that happen in 2008. But I do not think we can see a bull trend re-established until after the election is decided and we see the new president unveil plans for the economy.

As a result, watch for the bears to control the market for the rest of this year and into the first part of 2009. We’ll see some rallies along the way, but the major trend will be sideways or down.

Have a great weekend.
F.S.

If you would like investment strategies that attempt to minimize risk but still provide the opportunity for solid growth, check out the offerings from Strategis Financial Group.  For information, call 800-279-3377.

You requested this MarketOwl free e-newsletter. Please add support@marketowl.com to your e-mail address book to ensure prompt delivery.

There is really very little to write about the equity markets right now. As I’ve indicated recently, the only sectors making any headway over the past few months have been gold, energy, and bonds. For the past few weeks, even those sectors have weakened.

Below is a three-month chart comparing oil (black line), gold (blue line), bonds (red line) against the Nasdaq (gold line). Since early March, the only one that has made any headway is the Nasdaq. The others have all given up ground.

This is a perfect time for investors to remain parked on the sidelines. The risk from being invested in the markets right now outweighs the prospects for any significant reward.
F.S.