Treat Any Stock Market Weakness as a Buying Opportunity

by Claus Vogt 09-02-09

The seasonal market statistics are clear: September has historically been the worst month for stocks of the year. Plus it’s followed by October, the month of the most spectacular stock market crashes in history.

This is why many bears — who have actually gotten more visible again during the past few weeks — say it’s time to get out of the market now.

These seasonal stock market statistics are certainly true. And after the strong gains since the July interim low, the market is due for a correction.

So the market may pull back a bit in the short term. But I don’t see it being more than a correction.

In fact, if stocks do go down during the next few weeks, you should probably consider that a buying opportunity.

Here are my arguments for that medium-term bullish view …

During This Phase of the Business Cycle Fundamentals Do Not Matter …

To begin with, I want to put into perspective the power of bearish arguments based on the state of the economy.

First, during this phase of the business cycle — that is at the end of a recession or the beginning of a new economic uptrend — fundamentals do not matter for the financial markets. That’s because they’re mainly liquidity driven and based on hope, not on facts.
The gloomy state of the economy doesn't mean a lot to the markets right now.
The gloomy state of the economy doesn’t mean a lot to the markets right now.

Moreover, economic data are a mixed bag at best. So the bulls and the bears can pick whatever news underlines their respective arguments. Only later during the cycle do fundamentals have to pick up to replace hope with facts. If they don’t, the bear will return.

Second, the Index of Leading Economic Indicators (LEI) rose four months in a row, finally crossing the zero line in July with a reading of 0.2 percent. This indicator has an excellent track record of calling important turning points in the economy. Right now it’s indicating the end of the recession. So there’s a good and historically valid reason for the above mentioned hope for some kind of a recovery.

Third, the stock market has a shorter time horizon than most of the fundamentally-based bearish arguments. So they’re not important now, but will start to matter later. And I expect the LEI and other time-proven indicators to warn us before this time arrives. Therefore, during the next three or four quarters I cannot see how the economy could collapse again, especially after all the recent massive worldwide stimulus programs.

Fourth, the stock market can ignore fundamental headwinds for a very long time. Fundamentals are long-term drivers of the financial markets. They have no short-to-medium-term predictive value. The very strong momentum of the current stock market rally gives you a clear hint that this rally has the power to ignore a lot of bad news for some time to come.

Plus …

The Market’s Technical Signals Are Pointing to Strength …

Some medium-term bullish developments have taken place during the past weeks and months. You’ll see in the chart below, a very clear bottoming formation with a technically strong upside breakout.


Let me explain the specifics in this chart, plus a few other technical indicators that aren’t shown …

First, most major indexes show very solid chart patterns. Take the S&P 500 as an example. You can see a nice bottoming formation, which started to develop in October 2007. The breakout, which happened this July, is a clear medium-term buying signal.

It indicates a medium-term trend change from down to up. The formation is an inverse head and shoulders, one of the most reliable patterns.

Second, coming off of the March 2009 low, momentum indicators (the rate of acceleration of price or volume) shown as PMO in the above chart, reached extremely overbought levels. This is typically a sign of impulse or a kick-off move.

Third, the breakout above the neckline of the bottom formation (950-955 in the S&P 500) was accompanied by very good market breadth (the number of stocks advancing relative to the number declining). This indicates a broad-based uptrend with most stocks and sectors participating.

Fourth, the advance-decline line and the advance-decline volume line both made distinct new highs for the year thus validating the new medium-term uptrend.

Fifth, two important indicators fell in line with the message of a new medium-term up trend: The 200-day moving average (MA200) changed course and started to rise. And the 50-day exponential moving average (EMA50) crossed the 200-day exponential moving average.

Sixth, longer-term sentiment indicators show that this rally is greeted by remarkable skepticism. Bull markets climb the proverbial wall of worry. This wall seems to be in a healthy condition.

What This Means For You …

History shows that financial markets move in prolonged trends and can ignore fundamentals for a long time. And now the technical pictures of stock markets all over the world clearly show medium-term bullish patterns. They indicate a nascent uptrend and are usually followed by further gains.

In hindsight, technical indicators are telling us that a medium-term bull market had started at the March lows. So from now on, bull market rules apply. And the most important rule is: In bull markets, corrections are buying opportunities.

Best wishes,

Claus