Reader Comment: Market Roll Over?

Reader Roger had these comments regarding an article he submitted with the title “Is the market ready to roll over?”

The above article makes a pretty strong case indicating the market is about to reverse direction based on a large number of technical indicators.

Of course this conclusion is based on the supposition that past market movements forecast future movements, even though the factors governing the current market may be a lot different than those in the past. Could you comment or elaborate on this article and its conclusions in your daily blog?

Also, I have noticed that Fidelity investments now uses trailing stop limits and trailing stop losses, which reflects an automated way to implement your SIMPLEHEDGE strategy for Stocks and ETFs, though not for any of Fidelity’s Mutual Funds.

The above link is very technical in nature, so I will hone in on only a couple of points. One of them that was made in the S&P; 500 chart is that the recent uptrend has been “extreme,” which means the angle of ascent has been much steeper than normal.

I have observed the same thing when reviewing my Domestic Trend Tracking Index (TTI), which has risen just as steeply over the past few weeks. As a long-time chart watcher, I can say that extreme up moves not supported by volume are floating on hot air and can be subject to fast and furious corrections; the question is, when?

While markets can remain irrational for a long time, there are other factors to consider. The article mentions developments like Eurozone debt issues, currency wars and the foreclosure mortgage crisis.

I would like to add the main driver of this rally to the above list, which is the Fed and its promise not to let the economy slip back into a recession by lending an assist via QE-2 (Quantitative Easing) when necessary.

While in my view no amount of intervention by the Fed can avoid another recession from occurring, given current circumstances, it has at least appeased Wall Street via the assumption that QE-2 will be good for the markets. It will be for a while, if the economy in fact will recover (slim chance) on its own thanks to the initial boost of QE-2.

If QE-2 fails, as it will in my opinion, the market will roll over and collapse like a piñata, since it has been only propped up based on false hope and premises. I have been pounding the lack of economic recovery theme for over a year. Obviously, the economy is like the Titanic; it moves very slowly and it takes a while to turn it around or affect it in any way; much longer than I had anticipated.

If and when QE-2 gets implemented, other factors can still play a role in derailing the current market up trend. To me, it’s very likely that an outside event, such as a European debt default, or the bursting of the Chinese or Canadian real estate bubble, will affect market direction and reverse the current trend.

This may coincide with technical analysis, or not, but there is no certain way of telling when a trend comes to an end. The only way you can have some control is if any of your holdings in your portfolio reverse and trigger your trailing sell stop. That is as close as you can come in determining that this rally may be over.

You can never forecast these events, you have to wait and let the market tell you when it’s time to get out. Anything else is simply guesswork.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
This entry was posted in Uncategorized. Bookmark the permalink.

Comments are closed.