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Andrew Carnegie

Friday, April 26, 2013

Market Gives the Green Light to Buy (Just Don't Chase)

Market appears poised to break to new highs, supported by price action, internal indicators and sentiment

Even though the CBOE experienced a computer glitch that shut down trading for three hours, stocks took little notice of the problem. Cliffs Natural Resources (NYSE:CLF) jumped 14.98%, Dow Chemical (NYSE:DOW) rose 5.6%, and Akamai Technologies (NASDAQ:AKAM) popped 17.71% — all on better-than-expected earnings.
At Thursday’s close, the Dow Jones Industrial Average was up 25 points at 14,701, the S&P 500 gained 6 points at 1,585, and the Nasdaq was up 20 points to 3,290. The NYSE traded 746 million shares and the Nasdaq crossed 472 million. Advancers led decliners on the Big Board by 2-to-1 and on the Nasdaq by 1.7-to-1.

Trade of the Day Chart Key
The S&P 500 pushed against minor resistance Thursday, as it approached the two remaining barriers — the all-time closing high at 1,593.37 and the all-time intraday high at 1,597.35. MACD is supporting a move to new highs with a strong buy signal, and other internal indicators are in positive modes, chiefly the slow stochastic, momentum (moving up), and RSI, which is neutral.
Conclusion: The broad market, as represented by the S&P 500, appears poised to break to new highs. This is supported by price action, internal indicators and sentiment numbers.
On Thursday, the AAII reported that its members’ optimism is below normal, and “more individual investors remain pessimistic than optimistic about the short-term direction of stock prices” (a bullish sign).
And so the weight of evidence has again turned in favor of the bulls. New long trading strategies can be initiated, but chasing stocks that have made huge gaps up is probably not the best course of action since gaps at the current stratospheric levels are usually closed.
The Great Seasonality Debate
Regarding yesterday’s mention of the seasonal strategy commonly known as “Sell in May and go away,” I hope that you have all read the opinions of our InvestorPlace experts from last April. All agree that the strategy has some merit, but each also concluded that it doesn’t always work.
Jim Woods said that the strategy “has been one of the most persistent long-term trends in the stock market.” But he suggested that its use is now so widespread that it may be overused and, thus, less effective.
Dan Burrows pointed out that it “has a decent track record, but like all patterns, it’s far from perfect.”
Serge Berger admitted to a “tendency for a summer slump in stocks” and provided a persuasive chart to back up his statement. He noted that it is important to “understand the current environment” and pointed out the market’s tendency for “irrational market moves” in the summer months.
Finally, Ivan Martchev said he accepts the strategy’s “statistical validity” since 1950.
Jim Woods also pointed out that the Stock Traders Almanac’s 37-year study shows that if an investor went long on Nov. 1 and sold all holdings on April 30 of each year, the investor would have earned an average return of 7.4%. But if the investor did the opposite and bought in May and sold in November, the return would be “a paltry 0.4% over the same 37 years.”
And this is important: The Stock Trader’s Almanac also points out that by using a simple timing indicator the results over the same period tripled. The foremost proponent of the strategy is Sy Harding of StreetSmartPost.com, who for the last 14 years has been a proponent of his Seasonal Timing Strategy (STS). According to Sy’s recent report, the STS strategy gained “213.0% to year-end 2012 compared to a 92.7% gain for the Dow, a 49.2% gain for the S&P 500, and a 37.7% gain for the Nasdaq.” Mark Hulbert confirms the numbers.
The strategy is very simple: Using MACD as a trigger, if a rally is under way on Oct. 16, an entry is made using the SPDR Dow Jones Industrial Average (NYSE:DIA) as an investment vehicle. But if the MACD is on a sell signal, the investment is not made until it renders a buy signal. For exiting, if the market is on a sell signal on April 20 you sell, but if MACD is on a buy signal you wait until the next sell signal to exit the market.
Have a great spring weekend....
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