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Early bull market? Avoid investing in this rally.

The [tag]stock market[/tag] was doing great last month. One would say that this was its bottom and now the market would grow and grow and grow… Others say the market has a capability to predict an economic turnover about six months ahead. Are we experiencing such prediction right now? Who knows.

Recently I was watching the market very carefully and I’ve seen some [tag]stocks[/tag] doing great. I’ve seen the market growing rapidly. On Friday a week ago and on Monday last week we could see a sell-off, but it turned to be one of the many [tag]correction[/tag]s which may come during every [tag]uptrend[/tag]. At the first look all seemed wonderful and good. Too good.

I do not want to be too pessimistic, but I still can see some odds here. When I was watching the market and some stocks I started thinking why the hell I am staying out of this market? Why not investing in the stocks, which are rallying? I had to repeat myself every day: I want to play safe. I cannot afford crazy [tag]investing[/tag] and this market still doesn’t follow all of my rules yet.

It may be quite dangerous watching the market, money shows on TV and news on Internet these days. Those look too optimistic and it would be hard to resist start investing in this period. Even though I do not watch such shows on TV much, watching the market is sometimes enough temptation.

Let’s take a look why it is good to stay out of the market.

Dow Jones Industrial

  1. The stock market reached it’s bottom (of this crisis) on March 06, 2009 and since then it was growing strong and the [tag]volume[/tag] was rising.
  2. However, there were no [tag]leaders[/tag] showing up, breaking out from their bases.
  3. The market was mostly growing on bad economic data (results were not as bad as expected)
  4. The market was growing on government promises, as Ronald Reagan once said: “The worst English phrase is: I am from Government and I am here to help.”
  5. Even though the market finally broke through it’s long term resistance (don’t be so excited, it still can fall back bellow it), there were no leaders anywhere to be seen.
  6. The second half of this new rally attempt was on decreasing volume.

One of the rules of [tag]RSS strategy[/tag] is to wait for [tag]confirmed rally[/tag]. This rally is not confirmed yet, at least I do not consider it as confirmed. Investing in this market may be dangerous and can be recommended to [tag]experienced investors[/tag]. Trading rule four says:

Assume you’re in a [tag]bear market[/tag] if the 50-day MA for [tag]S&P 500 index[/tag]* is lower than the 200-day MA. Don’t buy any new stock until 50-day rises above the 200-day MA.
(B. Glett, 2003)

* I use [tag]Dow Jones index[/tag].

This is the [tag]number one rule[/tag] almost in any [tag]strategies[/tag]. [tag]CAN SLIM[/tag] strategy uses similar rule, which basically says that an investor should invest in long positions only in up-trending market and in confirmed rally. The rule above is more safe play. You do not have to think about a dilemma: is the market good or bad for investing? Are we already in confirmed rally or not?
When taking look at the chart above, an investor may consider such market as confirmed rally so go ahead! Let’s invest! This rally can turn back down. This rally is led by [tag]laggard[/tag]s. And, [tag]50-day MA[/tag] is still deep below [tag]200-day MA[/tag] so technically we are still in a [tag]bear market[/tag]. Can you miss any [tag]investment opportunities[/tag] in this rally? Not at all. As Braden Glett says this is the time, when there is [tag]sector[/tag] rotation in the bear market as well as in [tag]early bull market[/tag]. The [tag]leadership[/tag] is moving from sector to sector.

When a bull market is just beginning, certain industries lead the way. Then, just as they seem to be getting started, those industries go dormant or even take a nasty crash as another set of industries take their place. (B. Glett, 2003)

Even though today’s market shows great results, investors should stay aside waiting for the market to preen itself. We are about in the middle of this process.


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