Sizing up the risks and rewards of being in the market

The market has been very turbulent of late, with fewer stocks in uptrends, oil and inflation worries, and continued Fed rate tightening. The major market indices are all down to flat for the year. At times like this, it pays to size up the risks and rewards of being in the market, and to consider raising more cash to lock in gains earned in this bull market cycle before the bear market begins.

Before I dive into this analysis, I must mention that the technical strength of the market after last week's scare over 'inflationary viruses' and NYC terror warnings is actually pretty good. The fact that no major market average lost more than %3.5 last week is encouraging, expecially because it left the buy signal I recieved on May 22 from the Zweig/Davis 4% model intact. Much less encouraging is the performance of the $NYAD 200 day moving average, discussed in the previous column, which is moving close to a 0 crossover. If that happens, it will be a clear sell signal, and one that I will follow. Also, the treasury yeild curve is still worryingly flat, but has not yet inverted.

Risks: Spiraling federal and consumer debt, combined with the slow-down in house prices, point to an economic reckoning day that is not too far off. The combination of high oil prices and persistent federal rate hikes usually leads to recession, and this time will probably not be an exception. In my opinion, we are closer to the top of this bull market, started in 2003, than we are to the bottom.

Rewards: Two books that I have read lately which make a case for bullish times ahead are The Triumph of Contrarian Investing by Ned Davis, and The Vital Few vs. The Trivial Many by George Muzea. Both books conclude that when the public mood and the mood of the media is most negative, that tends to be a good buying opportunity for stocks. By that measure, this is a great buying opportunity!

A weathervane to watch: I love finding useful tidbits in the form of new indicators or new uses for old indicators, so I am going to introduce a particularly interesting one: When the market's 30 week exponential moving average crosses down through its 60 week exponential moving average, it generally predicts a long-term drop in stock prices. Conversely, when the 30 week exponential moving average crosses up through its 60 week exponential moving average, it generally predicts a long-term rise in stock prices. This 'weathervane' provides buy and sell signals very infrequently, usually less than once per year. Go to stockcharts.com and pull up a chart of QQQQ with the 30 and 60 week EMAs - what you will see is that a clear sell signal was privided on 12/03/2000, and a clear buy signal (still in effect) was provided on 8/24/2003. In both cases, these signals provide late confirmation of the beginning of a bull or bear market, and in both cases, the move still had a long way to go after that signal.

Logical Thought of the Day:"The general who wins a battle makes many calculations in his temple ere the battle is fought. The general who loses a battle makes but few calculations beforehand. Thus do many calculations lead to victory, and few calculations lead to defeat: how much more no calculation at all!" - Sun Tzu, 1.26