Stay the Course

We are rarely at a loss for words but we have to admit when we’ve been bettered. The current market has simply stymied us. The markets have been in a trading range for two months and bearish divergences abound. It is difficult to come to market on a daily basis and find a unique way of saying the same thing. Nevertheless we will try.

Stay the course.

This is likely unwelcome advice for frustrated investors who may have exited the market weeks ago and seek reentry at the most propitious point. The indices have broken down only to recover; and then broken out, as they did today, only to duck back into their bases.

But while the break outs across the markets universally failed today to us there was nothing ominous about the action. Volume was light and the bears made little headway after the stall. That doesn’t mean today’s action won’t have consequences. Failed new highs can often yield to an increase in selling pressure. But nothing about today’s action suggests another attempt into new high ground isn’t in the near term future for the indices.

On the positive side the small cap indices have led the market the last two days. They have lagged badly during the current consolidation and have put in lower highs, setting up a threatening pattern. The aggressive gains are welcome. And the world leading Shanghai Composite, which took a beating last week, first on news that banks would have to raise their reserve ratios (potentially threatening lending activity that has driven the stimulus program) and then on the Dubai debt crisis, have rebounded smartly and on good volume.

We’d like to present a chart for your study:

You may be forgiven if at first glance you think this is the current S&P 500. After all, it does have some familiar attributes: a sharp rally that began in March; an aggressive uptrend throughout most of the year; and a tiring rally during the fall in which the index made little headway.

But it is not today’s S&P 500. It is the NASDAQ Comp from 2003. Samuel Clemens would be pleased at yet another example of how history may not repeat but often rhymes.

We now present another chart:

This is the same chart only with the time frame extended into January 2004. The market topped after that profitable little burst and we endured a rather choppy 2005. But if history doesn’t repeat, it suggests you should stay the course.

Of course there is no guarantee that the uptrend will deliver another leg up. Until the markets make a pronounced move higher we would not be aggressive in allocating new funds, opting only for situations that are clearly bullish by price and volume action and at proper buy points. Entries without catalysts in the current environment are invitations to endure choppy trading, make little headway and take small, but frustrating, losses.

An excellent example of what we seek is Potash (POT), which we profile on our sister blog.