Where are we in the market cycle? Riding the up-trend.

GMI6/6
GMI-R10/10
T210863%

I used my favorite indicators to review the Dow 30 Index’s action since 1915, as this is how far back TC2007 allows me to track this index.   I looked at the monthly chart and the following indicators: 5 and 30 month simple moving averages and the 25.4.4 monthly stochastic. I am posting a chart of the Dow 30 since late 1992. A few patterns leap out at me.   First, notice how the Dow spent most of the time in the roaring 90’s   up-trend above the rising 30 month moving average (red line) and with the 5 month average (dotted line) rising above the 30 month average.   (Click on chart to enlarge.) The stochastic (in the lower window) with two exceptions, spent almost all of the time above the 80% “overbought” level (top parallel line), until it began a steady decline in 1999, foreshadowing the major decline in the Dow. The 5 month average declined below the 30 month average. The bear market bottomed out with the Dow below the declining 30 month average and with the stochastic around oversold territory, near 20% (bottom parallel line). The market turned up, the 5 month average rose above the 30 month average and the stochastic returned to near 80% again.   In 2008, the process repeated itself, with the 5 month turning down below the 30 month average and the stochastic declining until it became very oversold again, around 20%.   The market has now rebounded, the 5 month average is rising nicely above the 30 month average and the stochastic has just returned to overbought territory, an area where it has stayed for years in some previous rising markets.

So where are we in the current cycle?   It looks like we are in a strong up-trend with no sign of any weakening yet.   In fact, the 30 month average has not yet reversed up, but the 5 month average is moving up nicely above it.   Now I have learned in trading   over the past 40 years that patterns are meant to be broken.   The road is littered with the carcasses of Ph.D.’s who wagered heavily and lost, based upon complicated mathematical relationships that worked in the past.   I can tell you that the simple patterns I have discussed below seem to me to have worked well over the past 95 years.   Major bottoms in the Dow have occurred with this stochastic below 50% and the more severe ones, around 20%.   So, I won’t begin to suspect the end of the current up-trend until I see the stochastic turn down and the 5 month average decline below the 30 month average. I’ll let you   know when that happens…….

Meanwhile, my General Market Indicator (GMI) remains at the maximum reading (6 of 6) and the more sensitive GMI-R is at 10 (of 10). Thus, all of my short term and longer term indicators for the   QQQQ (Nadaq 100 tech stocks), and the SPY (S&P 500 stocks) remain positive. The QQQQ and SPY have closed above their critical 10 week averages for 15 straight weeks. However, Friday was only the 15th day of the QQQQ short term up-trend.   The Worden T2108 Indicator is at 63%, in neutral territory. And 68% of the Nasdaq 100 stocks closed with their MACD above its signal line, a sign of short term strength. The weekly GMMA chart below shows that all of the short term averages (red) are above the rising longer term averages (blue), reflecting an established up-trend. So with my more conservative funds, I am adding to my positions in the major index ETF’s like QLD, SPY and DIA, a comfortable way for me to ride the up-trend.

IBD announces “resumed confirmed up-trend”, gives up on follow-through day; How mutual funds rip off investors; IBD100 list top 10 outperform indexes

GMI6/6
GMI-R10/10
T210863%

I thought I would never see the day that IBD would switch from an outlook of “market in correction” to market in an up-turn without the required follow-through day on high volume.   However, they say in Monday’s edition that the market has resumed its up-trend, “even if the classic sign of a bottom has eluded the major indexes.”   This renewed up-trend,   has caught a lot of people off guard, as it has come on a bunch of low volume days.   Maybe IBD has decided that a high volume follow through day is no longer needed to confirm a new market rally…..

A reader wrote to me to that he pulled his money out of a mutual fund and the mutual fund family would not let him buy back into the fund.   A lot of funds do not want people to get in and out of their shares and therefore have instituted restrictions against timing the market.   So it isn’t bad enough that most mutual funds must stay fully invested during market declines.   Now they are telling us that the individual investors must also ride their fund values down in a bear market.   I do not trade my university pension mutual funds often, but when my indicators tell me that a big down-trend is likely, I move to cash.   I therefore safely rode out the 2000-2002 and 2008 declines on the sidelines and my pension is now at all-time highs.   There ought to be a law against the prohibition of market timing for mutual funds.   The only good alternative right now is to get out of mutual funds and invest in suitable ETF’s. ETF’s have lower management fees too, so they are doubly good for the small investor……

It is often fashionable for traders to denigrate the IBD 100 list of stocks published each Monday.   The list contains the best stocks that fit IBD’s criteria for momentum growth stocks.   The stocks are presented in rank order.   People often opine that the top ten   stocks in the list have already risen too much and would be better traded as short candidates.   I have created some watch lists in TC2007 for four top 10 lists published over the past few months.   I decided to compare how a portfolio containing one share of   each of these top ten stocks performed as a group versus the Nadaq 100 and S&P500 indexes after each list was published. This table (click on to enlarge) shows that the portfolio of the top 10 stocks beat these two indexes in each case.   For example, the portfolio with the top 10 stocks on the list published on June 28, 2010, advanced +44% since the Friday before publication through this past Friday’s close.   In comparison, the Nasdaq 100 index rose +19% and the S&P500 index +13.9% during the same period.   Of note, BIDU and NFLX appeared in all four of these top 10 lists.   If one had bought BIDU on June 25th and held it through last Friday, one would be up +53.5% and 57% for NFLX.   So, maybe we should pay special attention to buying the top 10 stocks on the IBD100 list published on Monday, December 6.   I will update the table in January….

The GMI and GMI-R remain at their maximum values.   The SPY and QQQQ have now closed above their 10 week averages for 14 straight weeks.   On Friday, the new QQQQ short term up-trend completed its 10th day.   More than one half (56%) of the Nasdaq 100 stocks closed with their MACD above its signal line, a sign of short term strength.   I guess we will just have to ride this train until we get a definitive change in trend.