Avoiding Dead Money

  • Posted by
  • on December 17th, 2010

You can’t start a fire without a spark.” Bruce Springsteen

Surely one could dig through the archives of The Boss and find other lines that apply to markets, though it obviously wasn’t his intent.  But picture that stack of freshly cut logs on the back porch…each capable of serving as the foundation of a fire but useless without grabbing one out of the stack.  Now picture a perfectly constructed log formation.  Closer to a fire, but still lacking a catalyst to convert it from potential energy to a source of heat.  I could take it further, calling our pit or fireplace the safety net that protects us from harm…but I digress.

Random “logs” appear daily as we observe markets.  A few logs coming together to form an idea is a little more rare and useful, but still only a setup.  Without demanding that spark to energize the structure, we risk putting all of our money to work in ideas that look great on paper but lack the energy to deliver our goal…profits.

Hokey imagery, yes.  That doesn’t make it useless, it just makes it hokey.  Point is, we have to 1) ignore each random piece of “breaking news”, 2) pay attention to an assembled collection of information, 3) act upon appearance of our desired catalyst.  For some, that catalyst might be a new product or contract.  Others, an earnings report that demonstrates a turnaround or acceleration from prior growth levels.

For me, it’s simply a combination of price and volume.  That is my evidence that one of the following has appeared:

1) Increased Demand- price rise with heavy volume and large range(bullish)

2) Decreased Supply- price rise with light volume but large range(bullish)

3) Increased Supply- price fall with heavy volume and large range(bearish)

4) Decreased Demand- price fall with light volume but large range(bearish)

Why does it have to be any more complex than that?  Common elements confirming the appearance of a real catalyst include a move in price on expanded range…that’s it.  I like the use of volume, but each setup needs to be addressed independently, as volume tells a different story depending on the situation.

Bringing it to today’s market, let’s revisit my favorite market setup.  As I showed last week, I was very concerned about the signal sent by the overhanging pivot high from November 7, when nearly half of my stock universe made one month highs and then failed to overcome those highs in future days.  Monday brought a resolution to this, as the # of stocks making highs expanded to 33% while only 22% of stocks were now fixed on November 7 as its “anchor” day to overcome.  Again, demand has softened on occasion but supply just hasn’t shown an ability to overcome episodes of light demand.

This may seem subtle, but I consider it very significant.  It confirms what the trend of the $SPX and $RUT tell us…the trend is still up, and unconfirmed breadth represents rotation NOT correction.  This is borne out by the leadership shifts underway, from the momo faves of summer and fall to a more stodgy list of industrials.  Another brilliant disguise by this, the most doubted bull market of all.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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