Is this Rally Real or Fake?
Friday, March 23, 2007 | Teeka Tiwari
My, what a nice rally we have seen over the last few days!
Is it real, or is it fake?
Is it live, or is it Memorex?
In situations such as these, I rely on my historical knowledge of markets.
Much like an actuary, I am constantly gauging the market's health and comparing that against my own “actuarial tables.” I assess the different market factors currently at work, then draw high percentage probability events from historical data.
I want to know what kind of market we are in; are we faced with a young man in his prime, or an ailing smoker of 30 years? Using data that goes back decades, I can compare today’s readings with past readings and get a high probability of a future outcome.
Remember, there is nothing new in the stock market; it’s all been seen before.
Every now and then, though, a perfectly healthy 25-year old male will drop dead from a heart attack, or a man may live to be 96, even though he smokes two packs of cigarettes a day. The same thing can happen in the market. There are always exceptions to the rule, but those are events that are so far out on the margin that it doesn’t pay to try to game plan for them.
As investors, we want always to be playing the highest probability outcome currently on the table.
Two weeks ago, the New York Stock Exchange Bullish Percent reversed into O’s from above 70% to below 70%. Decades of data tell us that such moves indicate elevated risk in the market on the long side. Additionally, the average length of time that the NYSE BP has remained in O’s is eight weeks.
As a percentage player, I cannot ignore that data. Even if I’m wrong, and the market magically spirits higher, I still did the right thing.
Why?
Because you gotta dance with the one that "brung ya." Whatever system you end up using to pick stocks, you must adhere to it if you want to get the benefit of the system. A watered down approach puts you back into the gambler class, and gamblers don’t last long in this business.
So what does look interesting here?
I would urge you to start taking a look at some of the foreign markets. This is where the real action is going to be for the next several years. China, India and Europe all look much better on a relative strength basis than the US Markets.
There are some groups here in the States, though, that you should take a look at. Oil Service, Gas Utilities and Steel stocks all merit your investment attention. On a relative and absolute basis, they are beating the pants off the broad market. This is especially noteworthy given the overall weakness that the broad market had been experiencing.
So I will continue to look for shorting opportunities, and I will continue to be very cautious on my new buys until my indicators tell me that time for caution is over.
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Teeka Tiwari
Chief Investment Officer
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