Please - No knee jerk reactions

Through the first half of January 2010 all of the major indexes had posted gains of close to 2% before the last three days of last week brought much of that to a screeching halt. Despite the fact that indexes like the Dow Jones Industrial Average fell more than 400 points in a week’s time we have mostly seen a reversion to the mean from statistically overbought levels. In layman’s terms: demand had pushed prices way up and this pullback has brought prices back to the middle of the ‘field’.

A knee jerk reaction is not necessary, nor productive. What we have not seen is deterioration in the trend charts of major indices or in the relative strength relationship between cash and market indices. Stated another way, equities as a group, are still exhibiting superior relative strength when compared to cash. Instead of a knee jerk I will take some time and review the current positions in the portfolio. If your stocks are giving sell signals, violating major areas of support, violating trendlines or dropping in score, I will be sure to take some action. Otherwise, the only action that may need to be taken is to raise stop loss points.
150 point swings in the market may seem like a relic of 2008 but, the fact of the matter is that for most investors such moves are simply ‘noise’. What is far more meaningful is not whether the market is fluctuating (as surely it will), but what trends can be deduced from those fluctuations. Is the market still moving higher on rallies, and is it able to find buyers at higher levels than on previous declines? Those are the questions that are worthwhile to investors and also what the Point & Figure chart is designed to evaluate. Right now we are still observing general trends of higher tops and higher bottoms from the equity benchmarks.

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