May 2013OPENING POSITION
May 2013When the Dow Jones Industrial Average (DJIA) crossed above the 14,000 mark, you could sense some euphoria in the market. But was it enough to lead us to believe that we were out of the doldrums and finally going to see the optimism that market rallies usually bring? The way the DJIA has moved since it hit its all-time high leads me to believe that investors and traders are still hesitant. It seems as though everyone anticipated a correction and started selling their positions. This, of course, affected the supply and demand dynamics of the markets, resulting in a market that would move up a little and then consolidate.
This behavior is not typical of market tops. We are not seeing the trading volume that is usually associated with rallies. During the bull run that led to the tech bubble in 2000, almost everyone was invested in the technology sector. There was so much optimism at that time that people were even talking about the Dow hitting 36,000. But that all ended very quickly. Then there was the 2003–07 “debt-fueled” rally that led to the housing collapse. We saw a lot of optimism at that time too and we know how that ended. We’re still recovering from that collapse, and in spite of the markets rallying, people are still not rushing to buy equities. Although economic data in the US is showing modest growth, consumer confidence is still weak. It will take a lot more economic growth and stability before we see any strength in consumer confidence. The markets are still jittery, and the slightest bit of turmoil throws it off balance. But it bounces back, which tells you that although people are cautious and quick to sell on any negative news, they are willing to get back in when the news turns around. The memory of the housing collapse still haunts us and will continue to do so till we see the housing market show enough strength to offset all its losses.
Optimism will return to the markets, but until that time, watch for swings in the markets and take advantage of them. (For a look at how one trader and market analyst looks for swing trade opportunities, see our interview with Arthur Hill beginning here.) While we may not be seeing a bubble brewing, the market has come back fast and if it continues at that speed, that top may creep up on us. More important, remember that May is typically a month where you can expect to see some selling. Will that pattern persist? In his article in this issue, Mark Vakkur takes an updated look at this market axiom to see how the phenomenon has fared. In the meantime, be mindful of that and plan your trades well.
Jayanthi Gopalakrishnan, Editor