The Market

Today the market is once again doing what it does best: Confusing people and separating them from their money.

For the last eight days the market has gone almost straight up. Eight days is a long time. On day one or two people notice that the market has stopped going down for a while. Then they watch it go up a lot more over the next couple days. After a while it's too much to take. They know they're missing a rally. It's obvious. And since the recent rallies have been of such short duration, time is of the essence. On day six or seven they get back in, only to have the market roll over again in a decidedly nasty fashion.

"What happened?" They ask. "Just a few days ago everything was rosy. The economy was getting better. Earnings season was going to be great. Stocks were upgraded. Europe was putting its troubles behind."

The market does this over and over and over. Yet, the "reasons" it manages to do it over and over and over are always different. Today the headlines ring out, "Consumer Sentiment Drives Stocks Down." So, the market sells off, a little at first, and then fear sets in and it sells off a lot more.

The fact is, the "reasons" for a shorter-term rally or correction usually aren't all that important. Often they are the result of the never-ending cycles through which the markets are continually moving.

For those who live near the ocean, high tides and low tides are understood. The stock market also has high and low tides. Once the market gets "overbought" to a certain degree, it sells off. Once the "sell-off" (oversold condition) becomes too extreme, it rallies.

As you can see by the photos (You can click on them for a better look), the market was getting to an overbought level. It had to correct and it did. Chances are it will continue correcting until it gets oversold again, at which point it will rally (stochastics and oscillators measure those levels).

Looked at from this perspective, it should be fairly easy to make money in the stock market. Nevertheless, that's not the case, because the cycles occur at all time intervals. There are 1 minute cycles, 1 hour cycles, daily cycles, weekly cycles, monthly cycles, yearly cycles, generational cycles, and so on. A trader or investor has to choose which cycles are important to him/her (long term, intermediate term, short term) and do his/her best to get in tune with them. It's never easy because the market never does the exact same thing twice. Sometimes "oversold" can get even more "oversold" and "overbought" can get even more "overbought". There is never certainty in the market. However, if you understand how the cycles work, then you can at least put the odds a little more in your favor.

Right now we appear to be in an intermediate term (or possibly long term) correction. The trend is down. The 50 day moving average (red line) is headed down. The trend line is down too. So, we may have just finished a short term rally which was set up eight days ago from a fairly oversold condition.

So, we are in a secular bear market (14 to 20 years), the intermediate term trend looks down and the shorter-term trend also looks down. Moreover, the action of individual stocks seems to confirm this. Therefore, it's probably not a good idea to be long or to be initiating long positions at this time.

The year 2010 looks very similar to 2004. Both of those years were preceded by strong rallies. The market corrected and bottomed out in August of 2004. I wouldn't be surprised to see the same thing happen here in 2010.