Wednesday, March 18, 2009

Technicals

The S&P 500 index has rallied straight up from its bear market low, breaking through one potential resistance line and bumping into the next.

Market sentiment has become extremely optimistic during this rally, so I'm not too concerned about the first trend line violation. If the resistance line at 800 holds and the market turns down, then my GRZZX position could pay off pretty quickly. If the S&P manages to keep rallying, then I plan to sit tight as long as sentiment continues to climb, and might even consider adding funds to my Roth IRA for another GRZZX purchase.

The situation that would compel me to cash out of GRZZX with a loss would be if sentiment starts to turn pessimistic while the market continues to rally. Stay tuned.

7 comments:

jolly_rancher said...

Don't you find your optimism numbers quite suspect? I mean, the market and the economy have suffered the steepest decline since 1974 or 1929, yet your numbers point to extreme optimism. How is this so? Don't you think that you're really just looking at coincident indicators? The economy and the stock market are ratcheting downwards regardless of sentiment. I really doubt people are optimistic today or yesterday or tomorrow. And if they are, they're a little nuts. And if they are, they must have been wildly exuberant at the nadir of the 1991 and 2001 bear markets, and at the zenith must have been on ecstasy and prozac overdose. If investors are optimistic now, when the heck were they ever bearish?

Jody Wilson said...

I completely agree that the economy will do whatever it's going to do regardless of stock market sentiment, but there really are people out there - more and more with each day of rallying - who think the stock market has hit at least a mid-term bottom. I can't tell you why they think this - only that they do think it.

jolly_rancher said...

You might want to take a look at the XSD. It has been a leading indicator all the way down. Semiconductors are very very sensitive to economic downturn. But the XSD did not confirm the recent leg down to Dow 6500 and has broken out. That doesn't lead me to be bullish, but I'd think twice before being short.

Good Luck,
Jolly Rancher
West, Texas

Jody Wilson said...

Well, XSD has only been around for three years, so counting on that leading trend to continue certainly has its own risks.

You say you're from West Texas? I'm going to be at McDonald Observatory again in late April, so I hope you can arrange for some clear skies for me!

jolly_rancher said...

The town of West, Texas near Fort Worth. It's usually pretty clear here, but at Fort Davis you ought to have no problem seeing the stars. Thanks for the tip. I think I'll bring the kids there next time we're driving through.

Anonymous said...

If I understand your model, you are saying that optimism is a bearish indicator because all those stock buyers will need to sell to take their profits. But what about all the buy-and-holders who simply have cash on the sidelines and want to get back into the market for the long term...no intention of selling for quick profit. Can't they drive the rally in a sustainable way, "despite" their optimism?

Jeff

Jody Wilson said...

... optimism is a bearish indicator because all those stock buyers will need to sell to take their profits.

BINGO.

But what about all the buy-and-holders...

There are only two groups of buy-and-holders: Those who have already cashed out from disgust, and those who haven't (yet).