Opening Position
October 2009
In the financial markets, October has always been viewed with a lot of pessimism, and for good reason. Some of the most significant declines in the market have taken place in October. Two come to mind: October 1929 and October 1987. And October 2008 looked like it was going to mark a similar, significant downturn in the market, but the market surprised us and continued its slide in the months to come. So after all this optimism that has entered the markets during the summer of 2009, will market sentiment turn for the worse in October 2009?
The markets certainly seem to have taken a positive turn during the summer months of 2009. All the broader markets have rallied significantly higher from their March lows. In fact, if you look at the charts of the broader indexes, you can see that all are trading well above their 50-day moving averages with higher highs and higher lows. On the surface, the charts paint a perfect picture of an emergence of a bullish market, but let’s dig a little deeper. What I am seeing happening from July to August 2009 is a bullish rally that has gone too far, too fast. But that rally didn’t come with strong volume, which, given that it is summer, shouldn’t come as a surprise. But it is going to have to be much stronger than it has been to convince me that a bull market has truly started. In order for a bull market to really take shape, we need to see a lot more money flow and we need to see something that is going to fuel growth in the markets. If you look at the economic fundamentals, we’re not seeing anything yet that suggests a bull market. But the markets don’t necessarily go hand in hand with the economy.
We don’t have to wait for the bull to arrive before trading in the stock market. Strong and quick rallies similar to what we saw in July—August 2009 open up plenty of opportunities for traders. As long as you’re not caught on the wrong side of the trade, you can make good profits. Keep a close watch on those price charts as well as the volatility of the markets. A market that has moved too far from its mean is one with too much added risk, and that type of market is not sustainable. While it does present profitable trading opportunities, you should only venture into such a market when you truly understand its behavior. That’s for the more experienced traders, but till you get there, you can do well just by sticking to the simple indicators and chart patterns. It may mean fewer trades and smaller profits, but it also means less stress.
Jayanthi Gopalakrishnan, Editor