Grinding Ahead

Technical analysis tries to predict the future direction of stocks from charts of historical prices and volumes. To me the “science” of TA is too much like black magic; the wizards peer at charts like tea leaves and discern patterns oblivious to the uninitiated. At this juncture technical analysts are flashing warning signs that the spring rally has petered out. Schwab’s analyst warns:

This rally is long in the tooth and, now that the indexes are up in serious resistance levels, I believe a correction or pullback probably isn’t very far off. In situations like this, normally I aggressively take profits and use sell stops on remaining positions to help protect myself in the event of a downside reversal.

The reason I am becoming skeptical here is that many of the stocks that have been leading this rally are now moving up on lower volume, while the volume on down days is surprisingly strong. I am also not seeing leadership stocks with strong earnings breaking out of sound bases, as normally seems to be the case after a significant bottom is formed.

I'm paying attention to technical analysis because the above is in accord with my gut. In early March we were at a Graham-and-Dodd buying opportunity when you could find stocks selling for less than liquidation value and/or you could justify buying some based merely on dividend yield. Now that the market has rallied strongly, earnings growth becomes much more important.

It’s my judgment that the Administration’s long-term economic strategy of vast spending and deficits, coupled with its unchecked seizure of important sectors of the economy like health care, autos, and energy, not only will stultify risk-taking and innovation but add so much uncertainty to private spending decisions that we’ll be lucky to have positive real growth over the next four years. (And I'm not even considering the downsides of a flight from the dollar or a 9/11- or Katrina-type event.) For businesses the game will change from how well they can market and manufacture their products to how quickly they can get their permits approved from increasingly powerful agencies who have confusing and conflicting objectives.

Unlike some doomsayers I know, I’m not getting out of equities completely, but I have sold into this rally. Building a retirement nest egg in this market is going to be a long grind. © 2009 Stephen Yuen

14% per yr for 4 years will get us back to the peak.