In late August, there were many articles that referenced the ominous approach of September, the upcoming Fed Taper, and the imminent breakout of World War III in the Mid-East tinderbox. All the articles I read came to the conclusion that with so much uncertainty now (then) would be a good idea to take some money off the table.
At the time I scanned through the battery of economic, fundamental, and technical indicators that I have developed and came to a different conclusion. In the middle of the doom and gloom, I stated in late August that "support had been found," the market still has legs. Keep in mind I was slightly nervous making that statement. I was also watching the news flow and was concerned about the future with no idea how things would work out. But I have learned to have complete faith in the trading models that I have developed, as a rock climber has complete faith in the ropes he uses when climbing. In addition, I have chosen to only write articles that give a clear indication of whether my indicators are Long and Short and pass that on to you.
Let's look at the immediate reaction following the Fed release. The top is the 10-minute chart of the S&P 500 ETF (NYSEARCA:SPY), the bottom line is the NYSE and Nasdaq Advance-Decline line with the histogram showing combined breadth. After the announcement there was a spike up, that held its strength for the remainder of the trading session.
The rally was supported by the Advance Decline line as indicated.
Examining multiple time frames, intraday, daily, and weekly, we also find a bullish scenario on the daily as shown by the Quarterly New Highs minus Quarterly New Lows (similar to the 52-week but much more responsive).
The daily is also bullish, and the weekly charts (that I use for managing money) are reflected in my Instablog weekly updates.
So why am I nervous? The short-term factors of fear that scared others as I stood firm have now abated. The short-term outlook appears to be clear sailing ahead. And that is why I'm nervous. Bear markets end in a period of doom and gloom, think Spring of 2009. The short-term rally that had occurred following the presidential election of a new vibrant President who promised hope and change and justice had fizzled. In fact, the cover of Time magazine showed a man hanging from a thread. Bear markets die in a maelstrom of bad news, unrelenting selling, quality assets are thrown by the wayside, and there appears to be no hope.
In the middle of this typhoon, the "informed buyers" begin to quietly accumulate shares at firesale prices.
Bull markets are the opposite, at the top in 2000, everyone was a market genius and everyone was talking about their favorite stocks. It was a new paradigm, the Internet was going to improve worker productivity and efficiency, it seemed asset prices would rise forever. The world was in relative peace. We are approaching a similar situation today.
As everyone else is getting more comfortable and complacent, I am growing more weary and concerned. My indicators, economic, fundamental, and technicals are still signaling to be long. But the sentiment has me concerned. These are the weather conditions for the beginning of the bear.