Where are the Leaders?

With earnings season officially underway, the first crop of announcements has proven to be somewhat disappointing. Combined with negative reactions to Alcoa , Fastenal , and JP Morgan , the market is in a strange state of flux. The Nasdaq (up 13% in 8 days) is demonstrating that it wants to move higher, but there’s no leadership to support the move. The best growth stocks always power the market in both directions. The market is yearning for leadership, but all of the leaders are tired. Perhaps earnings season will usher in a new crop of institutional favorites. If an uptrend is to continue, a catalyst is needed and it must come in the form of liquid, leading stocks.

What other information is there to glean from the current state of the market? For those who study their history, you will know that since the 1980’s, every major bull and bear trend (as measured on the Nasdaq) has started in either the month of March or October. Why is that you ask? Honestly, I have no idea, but the finding could lead us to some speculation about what we could be in store for next. From the start of this bull market in March 2009, the Nasdaq quickly worked its way higher and set its highest point in May 2011. Since that time, it’s been in a down-trending correction. Is it possible that the index has topped and is doomed to move further down? Of course, but it feels like more of in an intermediate term correction than the trappings of a true bear. To live up to the March-October precedent, the Nasdaq possibly has more room to the upside (March 2012?), though the jury is still out on this one.

On the technical side of things, those individuals who subscribe to Elliot Wave Theory could see this current move up as the start of a new bull phase. The theory argues that markets generally move in 5 waves- 3 waves up and 2 waves down in bull phases, and 3 waves down and 2 waves up in bear phases. Looking at the current climb from the bottom, one could argue that from May to June was down #1, June to July was up #2, July to August was down #3, August to September was up #4, and then September to October was down #5. The idea here is that after a bear cycle, a bull cycle of some sort would ensue. Psychologically, most investors are either worn out or shaken out of their holdings after at least 3 downward moves. While there are sure to be many interpretations (the current move up could be #3 rather than #5), the analysis still paints a muddied picture for investors.

So what’s an investor to do with all of these conflicting signals? At the end of the day, our job is not to predict where the market will go, but to correctly interpret daily price and volume action to ascertain the facts of the current environment and make decisions based on that interpretation. Jesse Livermore, one of the greatest traders from the early 20th century, once said, “There are many times when I have been completely in cash, especially when I was unsure of the direction of the market and waiting for a confirmation of the next move.” As of Thursday afternoon, a clear trend has not yet emerged and an investor is best to heed Livermore’s advice.

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