Rising stock prices demand traders' attention

While it’s our job to comment on the stock market, it’s been difficult to ignore the actions of the precious metals markets, gold and silver, of late. That sector has not only been the dominant performer over the past decade and year, but historical highs developed yet again last week. And despite a gain of nearly 500% in gold since February 2001 and of nearly 1100% in silver since November 2001, many pundits remain perplexed as to WHY Gold and Silver continue to rise. The reasons for the rally continue to proliferate. From "inflation hedge" to "fears about government spending" we hear a litany of justifications for higher precious metals prices. All may have some elements of truth, but the Number One reason prices have been rising is almost NEVER mentioned -- more buyers than sellers. That reason is too simple for many. And yet, ironically, that is the most important reason.

Which leads us to three conclusions about the markets we have mentioned before and which need repeating once again.

  1. The primary reason to buy a financial asset is because it’s going up in value.
  2. The primary reason to sell a financial asset is because it’s going down in value.
  3. The two most important considerations that will ultimately determine PROFIT or LOSS are where you BUY and where you SELL.

Naturally the process of selecting WHICH issues will ultimately rise or fall and when they are bought or sold will require finesse, experience, and judgment. But what will not work is to simply slip into a mindset which accepts the notion that "Buying for the long term" will resolve all ills even if the asset value begins to slip. That approach is NOT a strategy. Simply put, the investor without entry or exit strategies is not an "investor." He is a Kamikaze pilot.

In the stock market which offers no exceptions to our stated rules, last week all of the major indexes rallied, despite truncated trading due to Good Friday. But only the Dow Jones Industrials made a new high by reaching its best levels since March 2009. Nonetheless, all of the indexes including the S&P 500, the NASDAQ Composite, and the Value Line Index are within range of making new highs. As is our Call/Put Dollar Value Flow Line (CPFL) and the NYSE Advance/Decline Line.

Unfortunately, Cumulative Volume (see chart below), NYSE Up/Down Volume, and our Most Actives Advance/Decline Line (MAAD) continue to fail on the upside. At the same time, while Short-term Momentum is flirting with positive territory yet again, Intermediate Cycle Momentum remains just a nudge positive and could move lower into negative territory with a mere push by sellers. Also, while the two components of our proprietary Intermediate Cycle Timing Oscillator remain favorable, both have lost upside Momentum.

Click chart to enlarge

So what is an investor to do at this juncture, given the fact the market as measured by the main indexes is currently holding not far from new highs and could reassert the longer-term uptrend with only marginal buying?

If an investor is currently long, raising Sell Stops to the lower edge of trailing Major Cycle Price channels would be prudent. Those levels still give prices some room top work, especially if Buy levels were made early in the bull move. Also, part of a longer-term position could be exited if prices hit Sell Stops at the lower boundary of Intermediate Price Channel lows.

But if an investor is completely in cash, strategies become a bit more dicey. Given the lingering negatives of several market internals, to knowingly go long the market at this time would be a lot like marrying a drunk while denying the individual has an alcohol problem. It could take time before AA kicks in, but there is still risk. So the best strategy if the market hits new highs would be to commit only a portion of available cash to the long side while acknowledging that there would be little margin for error if the market turns sour.

In sum, unlike the gold and silver market that has moved steadily higher since December 2008 with few statistical divergences, equities as measured by the major indexes have been less exuberant on the upside to the extent Momentum has been failing. As a consequence via Rule #2 we mentioned above, "Sell because prices are going down," and the second part of Rule #3 "Where you SELL determines the profit or loss," will become more important.

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