The water sure feels warm and tempting to get in! The media is bullish and the Federal Reserve has repeated they are continuing their Quantitative Easing buying $85 billion per month of bonds and will keep its Federal Funds Rate close to zero until the unemployment rate falls to 6.5%. So is it time to buy Stocks? The last few weeks we wrote about about a high probability buy entry into the markets and they have rallied higher since. In these markets things change fast and we have to stay tuned in to what the markets are telling us because things can turn on a dime. Let’s take a look at the chart below for clues.
On the top of the chart is the Dow Jones Industrial Average going back to 1990, each bar representing one month. In 2007 (shown in yellow) the markets rallied past the 2000 highs into what is called a Bull Trap. This is a place that everyone who wants to buy has already bought leaving more sellers than buyers. This turns a bull market into a market correction just when everyone was starting to have fun! The 7500+ point correction occurred from 2007 to 2009 shown in pink. Next the markets probed lower than the 2002 lows into what is called a Bear Trap. A Bear Trap is an area where everyone who wants to sell has already sold leaving more buyers than sellers. This turns a bear market into a rallying market just when everyone upped their anti depressant dosage and panic sold! Since the bottom in 2009 the markets have rallied 9000+ points (shown in orange) and now are entering another potential Bull Trap area as the markets break above the 2007 highs (shown in white). So is it time to buy Stocks? The markets are known to throw us surprises and could melt higher without a correction but to keep the probabilities in our favor we wait for high probability areas to enter and could care less if we miss parts of low probability moves. This is not a time to get excited to enter the stock market, especially if a person has not participated in any of the 9000+ point rally from 2009!
For further proof to remain patient we can look at the bottom chart which shows the price of 30 Yr Treasury Bonds going back to 1990. Clearly the trend is up and although lately Bond prices have fell and the media is repeatedly talking about the shift of money out of Bonds and into Stocks, this chart shows that Bonds are only in a correction within their uptrend. We don’t have a crystal ball but can take an educated guess that just about the time everyone has reallocated out of Bonds into Stocks, the Bond Market will rally continuing its 32 year long upward trend and Stocks will correct. Time will tell, in the mean time look for high probability trades!