The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

15 December 2009

The new leaders (begin to) emerge

Up, down; up, down; one day looks powerfully bullish, the next day profoundly bearish. (NB: the ish suffix.) In the end, the equity markets head nowhere quickly -- despite yesterday's tag of a new recovery high.

This sideways trading is indicative of congestion, an area pattern builds, and whether it will prove a base or top remains to be seen. However, the equity market's internal structure (the subtle clues, as I view them) weakens notably. (A string of extraordinarily positive days could reverse easily the negative leaning of the subtle clues, though.)
1) The leaders that got us here (the rally from March 2009) lose upside momentum;
2) Various technical studies betray conservative investment decisions;
3) Volume has lacked notably throughout the recovery rally from March, but is especially diminished since 2 November ephemeral low;
4) Institutional investors abandon the market; and
5) The US$ begins to reverse course to up from profoundly down.

Consider that last item alone and apart: What bearing does it have on the (US) equity markets? You likely know already about the notorious carry trade: a stronger US$ would force reversals of all the no risk positions that helped this rally have legs. Consider, also, the changing dynamics from the perspective of inter-market analysis:
1) Metals (gold, et al) and resources (oil) turn down from up
2) Their stocks turn down from up.

Which translates into a serious headwind for the equity market averages and indices because the oil sector represents a heavy weighting (~15% of the S&P 500).

But it does not necessarily follow that the markets would again endure a monolithic decline ala Q4 2008; truly, monolithic declines are an exceedingly rare event. No, what could happen this time (say, the bulk of 2010) is a price decline in the former leaders while new leaders emerge. The market could head sideways to marginally down, but the new leaders would trade bullishly, if even explosively higher.

So who are those leaders? Please visit Investment Poetry for the remainder of this post, specific investment opportunities included.
-- David M Gordon / The Deipnosophist

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