Stock Market Negative Momentum : A Much Needed Breather

by | May 31, 2008 | Asset Management, Point and Figure

Just about the time Mr. & Mrs. Jones realize “hey that stock market is start to look pretty good!” is when the positive momentum often starts to fade — and often swings to a negative weekly momentum.

And that’s precisely where we stand today.

We have some cash on the sidelines. Some clients have a lot of cash on the sidelines. But understand, we’re entering a phase where the momentum has been negative for almost two weeks. On top of that, some of the short-term indicators I use to measure risk in the market have just recently given sell signals.
Momentum swings positive and negative, on average, for around 6 to 8 weeks. Meaning, the “green light” goes on for 6 or 8 weeks, then the yellow light turns on for 6 or 8 weeks. Sometimes it’s only 4 or 5 weeks, sometimes it’s 10 or 11 weeks. You get the idea. And also, every now and then, the red light comes on.

So when the market has been good, a stretch of negative weekly momentum for 6 or 8 weeks gives mutual funds and stocks a healthy breather — a pullback — to buy more, or to get in if you missed something earlier.

Sometimes negative weekly momentum provides a few weeks where the market just “hangs out” and does nothing, goes nowhere. But sometimes negative weekly momentum and short term sell signals are the start of a new turn down in the market.

So, it’s not fatal, but we’ve switched from a green light to the yellow caution light. I want to be deliberate and slow in putting money to work over the next few weeks. We’ll see what unfolds, and act accordingly.

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