I See Two Ways To Play This Market
The
market has not been able to post a rally into the end of 2002…fitting
for one of the worst years in the market.Â
As we saw the Dow and S&P 500 post feeble rallies on Monday, the Nasdaq
posted another distribution day. The
recent evidence points us to lower prices in the near future.
 
Unless price and
volume produce contrary evidence, there are only two ways to play things:
Remain on
the sidelines in cash or short
lagging averages, sectors and/or stocks.
I am a firm believer in cash and the sidelines during market declines
because of the increasing volatility that exists in taking on short positions.
To lessen the swings, my portfolios and the Trading
Service will take short positions in ETFs that reflect the overall market.
We curb our risk by limiting the size of the positions because
short-squeezes can produce abrupt rallies that can quickly trigger
closely-placed stops. Most of the
portfolio remains on the sidelines because Bull Markets and Market Bounces are
much easier to make money in than market declines.Â
Despite lower
prices possibly on the horizon, there are a number of things we can look at
going into 2003 to help indicate the length and severity of any declines.
I will be keeping my eye on the Volatility
Index, which currently stands around 32.
I would like to see a rally play off a reading above 50, or even as
high as 60.Â
I am watching the Put/Call
ratio. In times of declining
market averages, the indicator’s rise above 1.0 usually indicates a reprieve
from further selling.Â
I am keeping a
very close eye on sentiment.
Investor’s Intelligence is the quantifiable way to interpret this and
I have not liked what I have seen for some time.
Bulls stand around 50%, while bears are a paltry 30%.
Other indications of sentiment that have proven reliable include your
next-door neighbor’s stock market opinions, or the person that sits next to
you at work or is standing in line with you at the grocery store.
For example, a friend of mine who is also a CPA decided to hold off
further contributions to his 401(k). He
made this decision in late-September. Sentiment
can also be gauged by how many “talking heads” on CNBC think that
the market has bottomed. I am starting
to hear more and more “technicians” claim that the double-bottom
currently in place may not hold.
Moving into 2003,
I do like what I have seen in the number of 52-week highs vs. 52-week lows.
When leading stocks emerge to take the market higher, they will be seen
in this table.
Finally,
throughout the fourth-quarter rally, we have seen constant rotation among
leading groups rather than a sustained move. First
we saw medicals advance. Money left
that group and flowed into internet stocks. I
would like to see money move into a group and stay there.Â
Eventually, more money will arrive and we will have our move higher.
My Weekend
Research is still producing solid candidates to move into if we do see the
major averages firm up and produce a newly confirmed rally.Â
Stocks like Accredo Health
(
ACDO |
Quote |
Chart |
News |
PowerRating)
have failed to break out thus far, but are still finding support at their
50-day moving average. They may
produce another move in the upcoming days or weeks.
Multimedia
Games
(
MGAM |
Quote |
Chart |
News |
PowerRating) is a stock working its way up the right side of a
multi-month base. The company has
stellar fundamentals as seen through its recent quarterly growth rate of 96%
and ROE of 29%. Institutional
ownership has been increasing as we see more and more mutual funds moving into
the company.
 
Â
Ebay
(
EBAY |
Quote |
Chart |
News |
PowerRating) is still hanging near the high end of a year-long base.
  
To sum it up, I am
keeping an eye on the market and indications that it is ready to move higher.
I am constantly scanning for solid stocks to move into when that
happens. Regardless of bear market
bounces or Bull Markets, money can be made when stocks rise.
Take this brief pause in the market to reflect on 2002 and before.
Moving into 2003, I expect some solid opportunities and it’s best to be
prepared for them.
Finally, take a
deep breath and realize that we have all made it through another year of one
of the worst bear markets in history! You
have lived to fight another day and it will pay off for
you without a doubt.
Happy New Year and
Best Wishes for a Prosperous 2003!
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