Watch The Market Dive

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In case you missed it, Al Thomas, author of the well known book “If It Doesn’t Go Up, Don’t Buy It!” posted another right-on-the-money article last week titled “Watch The Market Dive:”

The form is predictable. The execution is slightly different.

That is the difference in a belly whopper and a 10 at the Olympics.

Each participant slowly climbs the ladder to the height that has been chosen. She then walks along the level area of the board to the end and grips the board with her toes, bends her knees and with a final spring to a high point her body dives to a final splash.

This is the same form for our stock market. Watch closely. Since March investors have slowly climbed its ladder (Called a ‘Wall of Worry’) and the market has now leveled off. It has reached the end of the level price range and is now ready to make its final spring before that fatal plunge into the depths.

Our market mavens have turned from swimmers into gardeners. The early seeds of March have sprouted into “green shoots”. Any bit of bad news that is not as bad as the previous news it greeted with sprinkling of fertilizer, shouts of joy and some buying. Some, not all, are willing to take a chance at this level. Lack of buying will allow the market to fall of its own weight. There is not enough fertilizer.

Any professional trader with 10 or 15 years of experience will tell the novices that he has never seen a “V” bottom that continued up. There always has to be a test. The market must come back to prove its strength by not making a new low. This is the famous “W” formation the institutional investors are waiting for.

The next market weakness must prove itself by not making a new low on the coming setback. Then professional traders will put the market up.

Historically in 1929 everyone remembers the horrendous bear market, but no one remembers that big rally in 1930.It was this subsequent decline that did more damage than the first decline. Will that happen again? That is the 64 Trillion dollar question.

Based on the actions of Washington politicians the most likely correct guess would be ‘yes’. Huge unbridled and increasing debt and trillions in entitlement programs can only stagnate the U.S. economy. Washington is following the same road as Japan which is now in its 17 year of recession.

Politicians find it easier to get elected by promising more “free stuff” than being financial responsible. As they get elected they shift the solution (if there is one) to the next generation. Our children and their kids will be paying these bills.

Maybe the whole world will declare bankruptcy and everyone can start over. And pigs can fly.

Our diver is approaching the end of the board. The final spring is about to be sprung. Investors are about to plunge in over their heads again. Many will drown.

I have to agree with this assessment and can only recommend that those investors, who were blindsided by last year’s market debacle, better be prepared (via a sell stop discipline) to deal with the possibility of another downdraft. I am not being negative here, but simply realistic in looking at where we are, economically speaking, and were we might be going.

We’ve rebounded off the bottom but only barely into bullish territory. There is no assurance anywhere that this trend will continue; on the contrary, with the question abounding about the reality of a second half recovery, we could see a trend reversal in no time at all.

If you have not read Al’s book, I suggest you do so. Yours truly, along with Trend Tracking, is honorably mentioned.

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Comments 5

  1. Ulli,

    I know this Al Thomas fellow personally and he is a real gentleman and very brilliant. I have read his book and read his weekly free letter. The "Two For The Money" strategy that he designed is a great piece of work and it does in fact work and certainly beats buy and hold by a wide margin. One can go to his website and read about it at http://www.mutualfundmagic.com and look for the big red verticle arrow on the left of side of the page for the menu.

  2. "I have to agree with this assessment…"

    This is more than an "assessment;" it's a straightforward prophecy. Since you "…agree…" then why in the h*** did you get us all back in the market, Ulli?

  3. Anaon,

    I have an opinion as to the market, just like Al does, but I follow the numbers to make my investment decisions, which keeps the emoticons at bay…that has been discussed many times.

    I have also repeatedly said, that the bottom is not in yet. That's my personal view, which can be wrong, of course. I let the trends tell me when to be in and when to be out.

    Remember May 2008? We had a whip-saw signal, which lasted about 5 weeks until our sell as of 6/23/08. Then the bear market hit with full force.

    Ulli…

  4. Just my opinion-I came across Al's book while I was looking for the investment books with the best reader reviews on Amazon.com. The book has so many 4 and mostly 5 star reviews, it's incredible. And I am very grateful to Mr. Thomas for instilling the trend following strategy in me. I was able to avoid two thirds of the 2008-09 bear. If I had followed the book's strategy from the beginning of the year, I would have avoided all the down market.
    That said, I think Al's paid newsletter leaves a lot to be desired. I read it for about a year and came to the conclusion that Mr. Thomas is Mr. Market. He could be very bullish on a mutual fund/ETF on Monday, somewhat bullish on the same fund Tuesday, neutral on Wed., mildly bearish on Thurs., and an outgright growling bear on Friday. Following his newsletter recommendations leads to lots of whip sawing and lots of 7% losses.
    I think Al is right about following the MAJOR trends in an upmarket. And I think he is right about being in cash in a neutral or bear market. But I believe that trying to follow his newsletter will lead to losses.

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