THE STOCK MARKET
Written Monday, May 5th, 2008: Weekly Overview.
We’ve been up for three straight weeks now. At least for the large cap indices, the Dow Industrials, the S&P 500 and the Nasdaq Composite. You know those US-headquartered but multinational companies doing lots of business overseas and thus benefiting handsomely from the weak US dollar. The question thus arises whether this rally is (1) a new bull market or (2) a bear market rally, a “sucker’s rally” which is speculated upon in a Bloomberg article this morning. Myself, I believe it’s a bear market rally as trading volume shrunk in April to 1.31 billion shares a day, on average. That’s the lowest since September 2004. Trading volume normally shrinks during any bear market. Obviously it shows institutional investors are still wary today and haven’t bought into the view the economy and therefore the market’s decline is over.
Rallies Always Appear. We always have to expect stock market rallies. From my studies of past markets, we always seem to have rallies. Even during broader brush bear markets. Or when we’re climbing, parabolically or not, and near an ultimate top, we still have to expect a dip then a rally back. When we’ve seen a bull market high and/or when we’re building a top, say in the long roll-over phase, we have to expect a rally. Or, finally, even in the midst of a bear market downtrend, we have to expect a rally. Elliott Wave theory spells this all out by the way (I’d recommend getting and reading Robert Prechter, Jr. book: CONQUER THE CRASH). Finally and most naturally, when building a bottom, we always have to expect a rally. All these rallies must have something to do with man being inherently bullish or knowing that to make profits in the stock market one needs to remain persistently bullish. Whatever, I’ve learned that all time periods and economic and stock market backdrop environments have rallies built in right around the next corner. Anyway right now we’ve got ourselves a rally. Yes, its been jagged and seems to be flying up right in the face of a preponderance of bears out there. For example, last week stocks sold off twice in the afternoons. Wednesday, some investors used the Fed’s latest rate cut to unload into and turned an up day into a down day. And then Friday, after stocks jumped excitedly on the better than expected loss of “only” -20,000 jobs, investors got around to selling as well. Still, no general panic takes hold as there remains too much bearishness around. Makes sense then, this back and forth, leveling off, process under way.