Ritholtz On The Bull Market

Wednesday was another winning day on Wall Street. The Dow rose 0.6% and the Nasdaq rose 1%. My current picks, tracked here, did far better. UTStarcom gained 2%, ProFunds Ultra Semiconductor 4%, and Maxtor 5%. I expect this trend to continue higher into the new year, although we won’t sustain this brisk pace the whole time. If we do, it’s new boats all around.

I found an excellent summary of why this rise is stronger than previous rallies this year. Barry Ritholtz is chief market strategist for Maxim Group and a columnist at RealMoney.com. The following excerpts are from his article “Buy The Dips“:

Plainly stated, a lot of people doubted this move. I have been getting a surprising number of questions about why this rally should be viewed as different from the three previous (failed) rallies of 2004, which included the moves off the lows in March, May and August.

I find several significant differences between this breakout and the earlier failed rallies of 2004:

Downtrend: This is the first rally to break the downtrend tracing back to late January 2004. That trend line (more or less) was where each of the prior rallies failed. Its penetration to the upside is a technical event of great significance. The previous trading pattern was selling the market at the top of the down channel and covering and going long near the lower channel line. The breakout changes the entire tone of the market: It shifts the stance of traders from selling rallies to buying dips.

Higher High: A bear market is defined as a series of lower lows and lower highs, while a bull market is just the opposite (higher lows/higher highs). For the first time this year, the Dow Jones Industrial Average, S&P; 500 and Nasdaq Composite each made a significantly higher high. That’s yet another bullish sign.

Year-to-Date Positive: Sometime earlier this month, we moved to positive territory for the year on the S&P;, Dow and Comp. Although we pivoted above and below the break-even line all year, the break now is most significant as it comes this late in the year. Why? This places enormous pressure on fund managers. It is easy to beat the averages when they are in negative territory — all you have to do is hold cash, and your fund will be down less than the indices (that’s considered outperforming). The danger to a fund manager comes from these fast reversals. If they are sitting in too much cash when the screens turn green, they very quickly see their performance slip. Suddenly, after a two-week rally, they are underperforming. A lot of this sidelined capital will be deployed before year’s end. That also adds to the bullish momentum.

The article contains helpful charts. If you’re looking to erase any lingering doubts about the ability to make money over the next few months, it’s worth a read.

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