Three Clues to Determine the Market's Next Move
By
Michael Cintolo, Editor of
Cabot Market Letter and
Cabot Top Ten ReportFrom Cabot Wealth Advisory 1/22/09
Sign up for free Cabot Wealth Advisory e-newsletterThere are times when I can write that the market has a very, very high probability of going up, or down, or that a certain stock or sector is in favor or has definitively topped out. In other words...I (and most good investors) strive to have conviction, putting the odds strongly in our favor.
Right now, the economy stinks, but the market's action is indecisive—it's certainly not good, but it's not terrible, either. So what do you do during such times? Personally, I'm not doing much; the market is open every day, and I don't see a reason to put a ton of people's money into stocks when the overall pattern is unclear.
Yet that doesn't mean I'm literally doing nothing. The key is knowing what to look for; if you have a few clues to watch, you can be one of the early ones on board the next move...whether it's up or down. So here are my top three things to watch in the weeks ahead:
1. The number of stocks hitting new lows on the NYSE (known as our Two-Second Indicator in the Cabot Market Letter). The number of new lows has expanded during the past week or two, but it's nothing compared to what was seen last October and November; its biggest reading of late was just 116, compared to thousands last fall! To me, it's a clear sign that the broad market is in far better shape than the popular indexes...something that often precedes major market rallies.
2. Philadelphia Banking Index (symbol BKX). This index has fallen to new bear-market lows in recent days, down more than 35% in 2009 alone! In our studies, a bear market will not end until the "leader" of the move (financials in this case) bottoms out. The opposite is happening now, and the lower the Banking Index slides, the harder it's going to be for the rest of the market to continue holding up.
3. Support levels for the major indexes. I'm always watching the major indexes, but the trading range of the past few months provides obvious support levels. I'm particularly interested in the levels of 7,800 and 8,000 in the Dow Industrials, 800 and 820 in the S&P 500, and 1,400 and 1,450 on the Nasdaq. Decisive breaks below support levels by all three indexes for a few days (not just by one index for one or two days) would be bad news. The longer they stay above them, the better.
Most investors are attracted to the guru who's going to tell them exactly what's going to happen, and at what time. Well, the fact is the guru doesn't know the future; nobody does. Instead, it's best to repeatedly check the market itself—in today's case, that means checking the above three items for clues as to which way the market is leaning. I think it's going to make a big move during the next couple of weeks, and you might be able to get a head start on it if you stay on top of the new lows, the Banking Index and the major indexes.
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