Four Day Winning Streak In US Stock Market: Chase Or Hold Off From Buy?

After the best two-day rally since 1987, the Dow (^DJI) and S&P 500 (^GSPC) were able to hold extend the gains into the holiday with a four-day winning streak. The Dow closed the session up 247 points or 2.9% and is now sitting at 8726. The S&P 500 bounced 30 points or 3.5% to close at 887, over 145 points off the 2008 low. The NASDAQ (^IXIC) got back to its winning ways after stumbling yesterday and surged 67 points or 4.6%. Crude got crushed today on Tuesday after a big rally Monday and today once again rallied. The volatility should not surprise you.

The four-day rally for the Dow is the first of its kind since April, at which time the index was just below 13,000! Wow, what a difference a few months can make in this volatile environment. It was great to see the day before a holiday up and with only a half day left until another weekend. However, keep today’s action in perspective; the volume was very light as most traders were fighting traffic by the time the closing bell rang. As a matter of fact the volume as declined each day this week during the winning streak. That is why I have been hesitant to jump on the bandwagon and begin buying with authority.

I am not alone in holding off until the market proves it is time to put more money back to work, however there is the lure of the rally that is capturing the wallets of many individual investors. You know who you are! The same investors that were running for the exits last week and were second guessing ever putting money back in the market. After four days, that is right - four days! You are no ready to chase the Dow up over 100 points. IF you are this investor please get your hand off the keyboard, take a step back, and contact a professional investment advisor to help consult you with your investment decisions. Because in the long run you are not cut out to be a successful investor. This may sound harsh coming from me a few hours before a holiday, but consider it tough love because I do not want to see you lose more money than you already have this year.

TIME TO CHASE OR HOLD OFF FROM BUY?

I have heard from many subscribers and individual investors that sold last week at or near the bottom and are panicking again. The difference between the panic last week and today is that investors were concerned about losing everything and now investors do not want to miss the possible rally that could be around the corner.

It is not abnormal to panic and sell near the bottom, but it is also not out of the question to chase performance. You are not alone and if you did not have a little worry about missing the next bear market, you would not be human. That being said let’s take a look at the facts and get past the fear and greed that cloud our judgment.

The major indices are still in intermediate-term downtrends and trading below all major moving averages. Even though I feel there is a 90% chance the market has found a bottom, I cannot be certain, keep in mind the indices remain in a bear market. For all we know the four-day rally is a dead-cat bounce, better known as a bear market rally. Until the downtrend line is breached and/or the 50-day moving average is taken out, it will be difficult to recommend moving large amounts of money back into the market. That being said, I have my clients in the market (not 100%), but they have sufficient cash to make a move when I deem it necessary. Of course I will not give away specific days or investment ideas, but just know we are ready to move on any day!

HAPPY THANKSGIVING - BE THANKFUL

As bad as things may be this year for the stock market and economy, please take a step back and realize there are many things for all of us to be thankful for. We live in a crazy, yet wonderful world and on Thursday let’s try and focus on the good and be thankful for it. I wish you and yours a very Happy Thanksgiving.

While I am thankful for a number of things this year, one is stocks at bargain prices that I will take advantage of for my clients in the coming weeks.

A stock I am watching, but do not own now, is CME Group (CME), better known as the Chicago Mercantile Exchange. With the high volatility and increased trading in commodities and derivatives, it is hard to believe that CME will not come out a winner after the bear market is over. The stock is down 69% in 2008 even after a 35% rally the past four days. Obviously I would not chase after a huge short-term rally, but some healthy weakness in the days ahead could be the buy signal.

Posted in Categories: Contributor, External Research, Stocks, USA.

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Comment by Donald W.

2008-11-26 20:22:30

After watching FAS go up from 12. to 28. it sure is time for a breather.

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