Author Topic: CURRENT MARKET CONDITIONS  (Read 1204 times)

Offline Reginald Hudlin

  • Landlord
  • Honorary Wakandan
  • *****
  • Posts: 9888
    • View Profile
CURRENT MARKET CONDITIONS
« on: May 27, 2010, 12:03:35 pm »
May 27, 2010

There is an old market adage, “sell in May and go away”. It was never truer than this year. What at first blush looks like a crazy chaotic month, will more likely, with a little perspective, prove to be a simple healthy bull market correction.

Fortunately, as outlined in my May 2nd email, we were able to see events shaping up that suggested an impending correction and we got out of our long positions in time to avoid taking any significant losses over the past month.

Now, there is an increased probability that the correction has run it’s course. On Tuesday, this week, the S&P 500 touched 1,040 and bounced off that level. From its peak of 1,219.80 on April 26th, the S&P 500 corrected 14.7%, to an intraday low of 1,040.78 on May 25th. As long as the market holds above that level of 1,040, the odds are that we will see a nice move up from here.

This morning, the market opened at levels significantly higher than yesterday’s close. But so far, the underlying volume is less than convincing and not as high as you would like to see to confirm the start of a new uptrend. I think investor nervousness could explain the lack of volume, especially leading into a three day weekend.

Historically, investors are more reluctant to hold long positions going into extended weekends because they fear the unknown. In turbulent market times, like these, that fear gets exacerbated making investors even less likely to buy stocks ahead of a long weekend.

The Best Case Scenario

We could be looking at a tremendous opportunity, if a few things line up.

First, we would like to see the market hold onto a nice gain today, followed by a modest pull back in prices tomorrow. Ideally, that pullback would be on lower volume. Such a pull back could be interpreted as confirmation of investor nervousness leading into the weekend, and used as a buying opportunity in anticipation of a pop in prices and volume next week. If we see increased prices and volume next week, that would further increase the likelihood that we are reentering a market uptrend.

There is no way of knowing how long a potential uptrend could last, or if it will prove successful, but as long as the S&P holds above that 1,040 level, the odds are in our favor. If the market breaches that level, the odds shift against an uptrend.

Another of Warren Buffet’s well known quotes is, “Be fearful when others are greedy. Be greedy when others are fearful.” With this in mind, seeing fear in the markets should be viewed as a source of comfort. Remember, just four weeks ago, when investors were complacently greedy, they were proven wrong. I’m betting that the fearful investors in the current market, will also be proven wrong.

As always, I welcome comments and questions.

Enjoy your Memorial Day weekend.