Confession: I'm a chartist who secretly uses fundamentals.
And I was still bearish in June after the S&P made a 10%
correction, for both technical and fundamental reasons. From the
euro meltdown and China slowdown to slowing US growth and a looming
"fiscal cliff," there was plenty to worry about.
But a funny thing happened on the way to the coming global
recession and market meltdown. The S&P kept reaching up from
the depths of 1,300 and making higher lows.
By late July, the index bounced off what had become an important
support level and made its 4th new high in six weeks. That's when I
retired my bear suit and said:
"Folks, the correction is officially dead and we are going even
Nothing changed in the fundamentals. In fact, by the analysis of
many top economists, and the dismal data flow from US employment
and manufacturing, things had gotten worse.
What changed was price. And I have a theory about price which is
simple, clear and requires very few technical indicators to make
What Does the Big Money Think?
Early in my trading career, I learned that when the fundamentals
seem cloudy or confusing, you can almost always get a "tell" from
the price action. How so? Because the net money flow of
institutional investors - and their buy and sell levels that create
support and resistance - tells you what the "serious money"
of the fundamentals.
Remember, a free market is like an auction where anyone is free to
bid or offer whatever price they believe is fair. There is no right
or wrong price; only the price that a buyer or seller agree on.
So investors vote on and weigh the market of stocks with their
dollars and thereby tell you what they think of fundamental values
in the investment universe. It is the collective
of the big boys and girls that matters.
That's why long ago I adopted a simple phrase to define my approach
price precedes fundamentals
. It doesn't mean that price is always accurate in telling you
where fundamentals are headed.
It just means that while most of the time the market finds
equilibrium where bulls and bears battle it out, there are
occasions when it swings to extremes of either optimism or
pessimism. And you can ride those trends of emotion for sizable
gains, until the winds of sentiment change and go the other way.
How to Make Big Money on Small Swings
Zacks' brand-new approach to market timing detects subtle, early
signals of movements in industries, sectors, and the market as a
whole. Then it doubles the profit potential of these swings with a
simple metric, and then triples that potential yet again through a
special twist on a common trading move. That is how a 3% move on
the market can become a +15-20% winner in no time at all.
See the metric and the move >>
Even if sentiment doesn't change, price can tell you which way the
market is headed next. That's how the charts told me the
fundamentals were okay in August and that it was time to be
bullish. Fund managers buying stocks based on their best estimates
of corporate earnings becomes a fundamental economic driver itself,
regardless of central bank "wealth effects."
Why were big investors net buyers of stocks in June and July?
Because to them, all the bad news had been discounted and they were
not going to be burned again selling stocks on groundless recession
fears, as happened in 2010 and 2011. Fool me thrice was not an
Where Mr. Market is Headed Next
There were many questionable and hard-to-measure driving forces of
the rally from S&P 1,300 to 1,475. ECB President Mario Draghi
threatening - and then delivering - support for their
troubled-country bond markets was one. Ben Bernanke firing the big
gun of open-ended bond buying in US mortgage markets was another.
And there was also a mysterious force: doubt. It's not just a wall
of worry the market climbed. It was total disbelief by so many
investors and bears on the sidelines. That force of doubt can still
drive the market higher the rest of the year, in the face of many
economic and political uncertainties. Here's a chart that shows
This is a 3-year weekly chart of the S&P, with 10 and 40-week
moving averages as a proxy for the 50 and 200-day varieties. I have
drawn lines at important levels of recent yearly tops.
1,350 was the rough topping area in 2011 and 1420 was the peak area
this year. 1,350 has been a key "area of interest" and bull-bear
battles several times. Now that the bulls have re-gained control,
it will be significant long-term support.
1,400-1,420 is also now a bull victory and I would be a buyer of
all pullbacks to there in the intermediate time frame. Note also
the confluence between these levels and the important moving
In 2011, I said that S&P 1,100 was an "extreme value area" and
that investors should aggressively accumulate stocks there. Now I
see S&P 1,300 the same way. But we won't be back there for a
while (next summer maybe) because this market has more work to do
making new highs.
As the market explores the ether above, at price levels we haven't
seen since before the Great Meltdown and Recession of 2008, market
players will continue to doubt and short it. They may be able to
make some money doing so as volatility returns around the election
and other Washington "cliff" hangers.
But, the big trend is bullish. Here's one more chart that tells me
This is the Russell 2000 in the same 3-year view. This month, it
retouched its all-time high from 2011 at 868. With the small caps
showing this kind of strength, I say:
"Don't fight this market or this economy. And buy the
How to Play the Market Swings
Actually, whether the movements are upward or downward, you can
profit by blending technical and fundamental principles
(particularly the Zacks Rank). That's the premise behind our
Zacks Market Timer
, a unique approach to predicting quick, explosive swings in
industries, sectors and the market as a whole.
Of course, we won't call them all correctly, but our strategy is to
cut short losses and maximize gains by 2X with a simple Zacks
metric and then 3X again with a twist on a common investment move.
Our first trade is Monday and this service will soon be closed to
new investors, so if this sounds interesting, I encourage you to
check it out right now.
Get details on
Zacks Market Timer >>
Kevin, a Senior Stock Strategist at Zacks, is a recognized
authority in global markets and renowned for predicting market
swings. A former market-maker in the $4-trillion-dollar-a-day world
of interbank trade, he developed the ability to track the movement
of money, and trained his reflexes to take advantage of it. Today
he directs the new
Zacks Market Timer
, providing commentary and recommendations.
To read this article on Zacks.com click here.