Tuesday, February 16, 2010

Building the Wall of Worry

Here are the latest covers of Newsweek and The Economist. How do they make you feel?

Do these covers make you want to increase your exposure to the stock market?

Probably not. That's why I see them as the latest bricks laid atop the wall of worry. The more bricks the media lay on the wall, the higher stock prices can climb.

Monday, February 8, 2010

Buying opportunity

If you have read my book and been following this blog you know that the aggressive contrarian trader purchased an above-normal long position near the 690 level in the S&P near the March 2009 low. The aggressive contrarian is still holding this position. More than 9 months have passed since the low. So now he is waiting for the 50 day moving average to turn down by 1% from its recent high near the 1114 level (blue line in the chart above). According to the trading strategy for the aggressive contrarian that was discussed in my book's chapter 11 such a turn down in the moving average would cause him to sell his entire long position.

However, in the current situation I think that even if the 50 moving average does turn down by 1% the aggressive contrarian should stick with his above-average long position and not sell it. Here's why.

For the first time since the March 2009 low point the stock market was mentioned in a New York Times headline - see the image above of the February 5, 2010 front page. The headline shows a moderate but not extreme amount of bearish sentiment, about what you would expect from a decline that has lasted only 3 weeks. For many examples and a thorough discussion of extremely bearish setiment in newspaper headlines read my book.

The fact that this headline appeared on the day that the market matched the length in percentage terms of the previous biggest drop within the up swing from the March 2009 low makes the headline doubly significant as a buying opportunity. Finally note that the market has dropped well below its 50 day moving average, and at Friday's low was just 2% above its 200 day moving average.

This combination of circumstances is a buy opportunity for the aggressive contrarian as I discussed in chapter 11 of my book. But since he already has an above-normal long position I think he should just stick with it. The only event that could alter the situation would be an S&P 500 close at least 5% below its 200 day moving average. Such a close would suggest that the market has begun a new bear market. I don't think we will see such a close any time soon.