On Friday, stocks opened on an upside gap, had a late-lunch profit-taking, but overcame selling with a late rally that produced a 2% gain. The gain was almost entirely tied to expectations that this week’s meetings betweenFranceandGermanywould somehow result in a solution toEurope’s economic woes. The Dow surged from its near-term technical barriers, along with the S&P 500. Both followed the Nasdaq’s punch through its September high the prior Friday.
For those companies that have reported earnings, about 70% have been higher than expected, and that’s obviously good news. But the flip side of that is that most of the big movers have now reported, so there will likely be an even greater focus on Europe andChina.
On Friday, volume, though higher than average for the month, was not close to what should be expected for a major breakout — especially on an option expiration day. The NYSE traded 1.2 billion shares and the Nasdaq crossed 642 million shares. Advancers exceeded decliners by about 4.5-to-1.
The leading index, the Nasdaq, has punched into the first real zone of resistance at 2,600 to 2,668. On Thursday, the index broke down from the zone but quickly popped back into it on Friday, and that’s a positive. However, the zone still offers significant resistance, and above it is the important 200-day moving average at 2,692 and the beginning of a massive structure of potential sellers.
Each of the major indices has closed above its August and September high. This changes the near-term trend to up, and increases the probability that the October lows will turn out to be the low of the year.
That’s the good news. The bad news is that the indices are still in a bear market. Seasoned investors have experienced similar bear market rallies many times, and our readers were warned that an exuberant bear-market rally could run to the neckline break at S&P 1,260 and perhaps even to the 200-day average now at 1,275. Buyers must now confront the broad band of resistance that looks like an NFL Red Zone. Layers upon layers of potential selling accumulated over nine months must be overcome, and thus far, no long-term barrier has fallen.
In Friday’s Daily Market Outlook, we covered the “six months strategy” and noted that over a 60-year period it has an impressive record of success. The basic strategy is simple: Buy the Dow 30 on Nov. 1 and sell on April 30. Sy Harding, of streetsmartpost.com fine-tuned the strategy by using a buy signal from the MACD, one of our internal indicators, to achieve an even better result. Sy invests as long as the MACD is on a buy signal on Oct. 16. If it is not on a buy signal, he waits until one is issued.
Only nine times in the last 60 years has the strategy failed to produce a profit — and all were during bear markets. Note that buying in October 2007 and October 2008 during bear markets produced losses of 12.7% and 14%. Nevertheless, this time-tested strategy has produced excellent results and should be employed as a timing device in the management of an investor’s long-term plan.But no strategy or investment plan should be based on a single indicator. A consensus of indicators tells whether the overall trend is up or down. Thus, in light of the fact that the bear is still roaming, I would defer employing this strategy until either we have a successful test of the October low or the market succeeds in establishing a bull trend.