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This Will Mark The End Of The Rally
That’s the question I’m asked most often. And for good reason too. Since the March lows, the Dow has rallied more than 45% in just 170 days. Throughout it all, there have been countless comparisons to the 1929-30 rally. A few months after the 1929 crash, the Dow put in a temporary bottom too. The index went on to rally 46% in 148 days. This has some bears saying the rally is living on borrowed time. True - the rally has been strong and it is showing signs of slowing down, but it’s hardly unprecedented. The greatest stock market rally in history makes the current run-up look quite tame. In 1932 the Dow soared 111% in just 98 days. That’s what is keeping the bearish sentiment so high. September is only a few days away. September, on average, is the worst month for stocks over the past 50 years. Of course, monthly averages are hardly good at predicting the future. If they were, we’d all simply short the market in September and buy in December and January (two of the best-performing months) and retire. The likely real reason for the average returns being so low is coincidence. Dragging September down has been the 1987 crash, Russian debt default in 1998, September 11 terrorist attacks, and last year’s meltdown. That’s just a few bear arguments that I’ve heard in the past few weeks. I still believe this is a bear market rally and haven’t turned truly bearish yet (except in a few places – e.g. ‘hot” auto parts stocks). There’s no doubt a downturn will come. But here’s the three indicators you should watch for to see when the next leg of the downturn is coming. Buying High and Selling Low In a world filled with endless news flow, advanced technical analysis and all the ratios any investor could ever learn, it’s easy to forget stock prices are still driven by two forces – buyers and sellers. Lately there have been a lot more buyers than sellers. (“Thanks for pointing out the obvious,” I know) The important consideration here is that the markets won’t take significant downturn until this changes. Just look at what happened over the past few months. For 19 weeks in a row investors shoveled money into mutual funds. The Investment Company Institute, which tracks mutual fund inflows and outflows, says $185 billion has flowed into stock and bond mutual funds in the past four months. This is a sharp contrast from last fall. That’s when we noted how investors pulling cash out of mutual funds were one of the key signs of a market bottom. Mutual fund tracking firm Morningstar found that: Mutual fund investors allocated more than $300 billion in new cash to equity funds in the bull market of 2002 to 2007 — with much of it put into funds when the market was near its highs. But in the ensuing bear market, investors pulled out more than $150 billion of assets — with the bulk of the withdrawals after the market melted down in September. Clearly, the trend is a strong one. More importantly, it’s not one to bet against until it’s over. Basically, don’t try to call the top on retail investors which can continue pouring money into mutual funds. It can go on for a very, very long time. Market’s turn when there’s no one left to buy. Up to this point, there are still a lot of willing buyers. It’s not just retail investors sending more and more money into mutual funds though. There is also another important factor which precedes all major market downturns: complacency. Article Directory: http://www.articledashboard.com Q1publishing is an investment guide where you can get all information about gold stocks and Healthcare Stocks. |
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