I focus more on fundamentals to select the stocks that I trade and suggest on my site. However, I can't ignore technical analysis, and this week there were some very important things that appeared on some very long-term charts. With the S+P 500 (SPY) breaking above 1576 and the Dow Jones industrials (DIA) and the Transportation index (IYT) confirming the move to new all-time highs, the thirteen year secular bear market in stocks is over for now-- and based on history, will be probably for quite a while like for two or three more years.
Because of our lack of knowledge of long-term history, most in my generation were unaware that in the stock market, you usually have a long period where stocks outperform most asset classes and make incredible moves like Dow 4,000 to 14,000. However, then they suffer violent bear markets where they essentially lose 40-50% of their value and take years just to recover to former highs. This process usually plays out over a decade or more, until there is no faith or interest in stocks among most investors and then the process reverses itself over a similar long period. This same vicious pattern played out from the year 2000 until just the last few days-- meaning it lasted for thirteen years. This one was especially viscous because of the severity of the corrections and the extreme volatility the last violent leg down took in the crash of 2008.
When the S+P 500 broke so decisively above the high from 2007 at 1576 and now is at 1632.79, this was the final nail in the coffin of the decade of stagnation in the stock market. That doesn't mean all that time there wasn't money to be made in special situations for traders and short-term investors, but for the buy and hold investor or index holder, it was a rough ride with little gains earned. This breakout is very important to me because it means on the index itself, no one has ever owned it at higher prices. That is the perfect situation either for an individual stock or an index, because no one is sitting! on a loss and will sell into any rallies when they get back near even.
All it takes for continued higher prices is marginal new buyers who are desperate to get exposure to the asset class. That is what is occurring right now; individual investors, pension funds, mutual funds, international investors and even some hedge funds who are light on their exposure or whose short positions are hurting their returns are all now trying to squeeze thru the door and buy stocks. That is great news along with the fact that the market isn't in a buying frenzy or going parabolic yet.
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It was also very important that the Dow Jones Transportation Index confirmed the move on the Dow and the S+P 500 with a new high. It had been range bound for a few months and was flashing a yellow caution light about the continued advance in the market and if growth in the economy is actually going to pick up going forward. Many people think the Dow Theory is old fashioned but it is really simple, the transports have their finger on the pulse of the economy, so if they aren't in agreement with the broad indexes there probably is a problem either in market valuation or the fundamentals in the economy.
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I know most of this seems pretty obvious, but sometimes you need to step back and just look at some basics and keep it simple. These charts clearly show that as long as the market stays above the 1576 level, it is in a position where overhead resistance is weak and continued higher prices should be expected. Of course a pullback would be expected and healthy, but that 1576 is now an important line in the sand to be watched. I have a feeling that even when we have a pullback, we're not going to approach that level for months--! but no o! ne has a crystal ball.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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