When it comes to investing, nobody has a crystal ball. One can take a poll of seven different investment "gurus" and receive seven different answers. There are many different indicators we can look at when trying to determine when to buy or sell. People have looked at earnings reports, business cycle analysis, the weather, candlestick charting, the winner of the last Superbowl, fashion trends, etc, etc. to try and predict where the market is headed. When there are so many possible indicators it means that any specific indicator is not 100% accurate.
One indicator I found to be reliable is a "contrarian investing" technique. What this simply means is that if a large group of people are predicting the market will move in a specific direction, chances are it will move opposite. Just like in the children's fairy tale, Chicken Little went around telling everyone the sky was falling and soon had everyone believing it! We saw this phenomenon in late February of this year. After it broke support at 7500, everyone-and-their-brother was predicting the Dow to CRASH and wind up near the 4000 to 5000 level. It proceeded to rally sharply and put in one of its strongest performances since the 1930s. Most "gurus" were left scratching their heads wondering what happened. They had to scramble to get in on the action. It seems we are seeing this same pattern developing now. I cannot say for sure that this market will not test its March lows sometime this summer. What appears obvious is that more and more people are expecting "the sky to fall."
The above chart illustrates the monthly Dow. As we can see the negative volume is decreasing. Downward momentum seems to be weakening, and there is still an upward trend on the remaining indicators. The activity over these past weeks has been on relatively low volume. This may point to a powerful reversal potentially in the making. The market typically pulls back significantly during the fall months. (there are alot of theories about this which I will not go into here) Can it happen during the summer? Sure, especially if there is an unexpected piece of bad news. We have seen alot of bad news in the market lately, most recently the increasing unemployment number. Remember, unemployment is considered a LAGGING indicator. The market tends to prefer forward looking indicators. Gold and oil, two inflationary indicators, have also pulled back significantly.
Regardless of what school of thought you might follow, 2009 has shown some tremendous trading opportunities. The average post recession return for the market is about 36%. This is much greater than the 12% average annual return in other years. Most would agree this recession has been anything but average.
