A Stockmarket Update - Where's It Heading
Ever since the market started to crater right at the beginning of the summer we've been urging readers not to panic as the sell-off, although quick and brutal, wasn't in danger of turning the long term trend lower according to our analysis.
Our main point within all of this is that by their very nature long term trends are tenacious as well as having a habit of lasting a lot longer than most people realise or even forecast.
The trouble as we've remarked many times before on this website is that the media gets everyone going with their incessant short term biases. So a market that goes up for a few days often in their words 'heralds the new dawn of a tremendous bull market'. Subsequently a market that falls sharply suddenly is likely to lead to a vicious bear market.
So it's been little surprise that stocks were not only hit with a wave of selling 4-5 months ago but also a tide of negative media comment and pessimism. But we've always felt that the trader or investor who can afford to sit back from the daily price movements, instead choosing to concentrate on the bigger picture, should have an edge.
Our Current Edge - Simplicity Offered By The XBD
Financial stocks have been the gasoline that's fuelled the bull market since its start back in 2003. So why not use this sector to forecast the future likely movement of the overall market? To put it bluntly if the financial sector holds up, the market won't go down and vice-versa.
Long time readers will therefore know that back in the January issue of this newsletter we introduced the American Broker/Deal index (XBD) as our key to successfully positioning one's money in the market. And yes, although this is a US index and many of us invest in the London market it really doesn't matter. The UK is not going to head significantly one way or the other without following Wall Street's lead.
When the Stockmarkets of the world started to sell-off in May the XBD index also got hit but according to our technical analysis of the situation it never looked like challenging the critical low of October 2005 (around 165).
Yes, sharp readers will have noticed that this low was on a percentage basis so far away from the 2006 high of around 242 but the probabilities of any market making an inverted V (Oct 05 low to Apr 06 high and then straight back down again) after such a dynamic move are virtually zero. If the market was going to collapse and turn the major trend lower then there would have been a retracement giving us a higher low which to work with - See the XBD chart below to visualise this.
How To Learn More About This Style Of Analysis
For those readers who want to understand more about this form of very simple technical analysis it might be worth your while to follow how we have analysed Wall Street from the beginning of the year.
The power of the XBD lies in simplicity. As investors or traders in the market we don't have to worry about doing a lot of research, in fact we really don't have to do any at all. Just a quick glance at the XBD to see how the financial stocks are performing and we've got the major trend in force.
Investment Strategy For The Coming Months
Note that while the Dow Jones and the broader S&P 500 index have both reached new all time highs the XBD hasn't and that in our book is highly significant.
S&P 500 Index - Weekly Chart
If the financial sector has been the power behind the 3-4 year bull market but now isn't leading the new advance then questions must be asked about the internal strength of the overall market. And so for this reason at the beginning of this week we've been selling 25% of our total portfolio and going into cash. Especially as we'd expect the FTSE 100 to be at or over all time highs for this recent rally off the summer lows. Maybe this factor will force us to sell another 10% of our portfolio next month on any further strength.
After all we think we've identified a really cheap sector with masses of potential to invest in - see page 3 of this newsletter for more details.
