Friday, May 28, 2010

Summer Rally Trying to Begin

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

Before I went into the meat of last week’s contribution, analyzing what’s now known as the Flash Crash on May 6 (“flash” referring to flash trading or warp speed computer trading), I touched on the stock market’s behavior and what I expected to occur over the coming days and weeks. As I wrote about in February during the last pullback, Bottoming Process Continues, I offered similar analysis last week.

“Often times, the low of the crash day is revisited at least once over the coming weeks and months, known as a retest.”

“ It’s ugly in the markets and lots of blood in the streets. While I don’t sense true panic, yet, there is certainly lots of worry and concern. If history is any indication, this correction should wrap in the next week or so and lead to another rally.”

We are now one week later, and after sticking my neck out here and on CNBC, I feel a little better, having seen several constructive trading sessions where the bears were first rejected at the same level as they were in February and then hit hard on Thursday.

Where do we go from here? On Thursday during a recent interview, I offered that we’ve seen enough historic oversold and washed out indicators to warrant at least a short-term, if not an intermediate-term, rally. Think of stretching a rubber band. The harder you pull, the harder it snaps back when you let go. It’s essentially the same with the markets. The band has been pulled pretty darn tight this month!

Those of you who are more technical in your analysis can look at popular indicators like the McClellan Oscillator, which measures the number of stocks going up and down on a given day, sentiment surveys among individual investors, the ARMS index, which is also a measure of stocks going up and down on a day along with volume as well as the behavior in small time (and usually wrong) options traders.

So many indicators were stretched about as far as they get unless we were on the cusp of an all out crash, something I did not think would happen and the odds were heavily stacked against. And now, the major indices are in a position to rally substantially into what is now my longstanding time target of Memorial Day to Labor Day for the final peak in this bull market. I will be keenly watching how bullish investors become should we see this rally, along with the number of stock market sectors participating in the rally and which are leading the way. This should clue us in on a potential top during the summer.

And until proven otherwise, I have to stick to my Dow projection of 11,500 to 13,000. You can bet I was mighty worried about that during the throes of the selling. Risk/reward wise, I think the short-term downside is to 9,600 - while the upside is well above 11,000.

Stepping back and looking at 2010, stocks are still down significantly in May, having given back all gains on the year and now showing a loss for 2010. My forecast for the year hasn’t changed either, calling for a best case scenario of a few percent up and worst case of down double digits. And I also continue to believe, controversially so, that treasury bonds will end up as a surprisingly good investment for 2010. This was mentioned in my 11 Shockers for 2010.

Feel free to email me with any questions or comments at

Until next time…

Paul Schatz
Heritage Capital LLC

No comments:

Post a Comment