A Bounce in Stocks Warrants Cautious Optimism

by | Apr 20, 2007 | Point and Figure, Stock Market Comments

Several indicators I follow have flipped positive recently.

That doesn’t mean I don’t want to run right out and invest every last dollar back into this market today. Here’s why:

Financial stocks make up 20% of the S&P 500 Index. At 20%,financial stocks are the largest piece of the SP 500, one of the most widely watched “yardsticks” in the industry. Well, just this week, as a group, these financial stocks gave a relative strength SELL signal…
…for the first time in eleven YEARS.

I discussed this with friends of mine in the industry. We all agreed that after eleven years, through financial events like the implosion of Long Term Capital (hedge fund), the meltdown in the financial area from mid 1999 through early 2000, and sheer ugliness in the markets in 2001-2002, the relative strength for this group “bent” at times, but never broke.

So, I’m curious…why now?
What does the market know, that we don’t?

Anyway, this reversal up in the market is positive…BUT…it does come with some strings attached. Those “strings” are that the indicators are at really high levels, so the risk remains ultra-high. It would not be a big surprise to see us flip back to a negative trend quickly.

At times like this, the market will generally NOT bail us out of mistakes.

So, sector rotation and picking the right stocks remains really important now. Again, I don’t want to run right out and invest our last dollar back into this market today.

For now, we’ll stay away from adding to Building stocks,Gaming stocks, Banks, Savings, Loans, and the Wall Street stocks. The commodities (and once again), oil, are where we really want to focus now.

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