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November 30, 2005

A time to buy and a time to sell, Wed., Nov. 30, 2005, 4:35 PM

The 2000-2002 bear market reached a confirmed cycle bottom in March 2003. That time was in my view the lowest risk entry point into the broad U.S. equity market, for several years. What followed has been a two-part bull market, at least to this point.

The first year of bullishness was a tide that lifted all boats. It ended on April 2, 2004. I started to blog a week later because I could sense a major policy shift in the Bush Administration. Shortly afterward, the Federal Reserve Bank commenced a series of rate increases. From that point forward, the U.S. equity market entered a series of sector rotations driven by factors such as interest rates, forex trend reversals, and economic data like the Jobs Report.

A cynic might even say that buying and selling raids by capital managers were organized around the release of economic data during this period.

Between April 2, 2004 and now, I believe the October ‘04 and mid-May '05 times were the only two that represented relatively low risk entry points to the U.S. equity bull market. As time passed, the market indexes were rising, but momentum (as measured by RSI) was falling. Technicians call that bearish divergence" and they know from experience that when stocks make new highs but RSI reaches a lower high, sooner than later the price pattern turns negative.

While some traders might take today's weakness in the broad equity market indexes as a new sign of a topping market, the chart above shows that I have seen that breakdown earlier.

In fact it was early November, following a very high-risk buy (see horizontal line), that I decided to not commit buying in the midst of this short-term bull phase. But since I was already in an 80-pct cash position, all I could do is watch the market indexes climb higher.

And in the past few days what l have done is close some of the put writes early, to lock in extra premium earned over the past couple months. I do not want to lose those income gains, and I don't really want to have stock put to me at Dow=10,800 when I think eventually it will likely go below Dow=9,800, and possibly to Dow=9,200.

Because of the heightened risk, the active managers and owners of capital must stay finely tuned. The present situation is not one where you can go off on vacation expecting to return with not much changed.

Posted by Posted by Bill Cara on November 30, 2005 04:27:26 PM | Category: Cara Today in the Market

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