Volatility has returned to Wall Street this week as traders react to every murmuring, rumor, and media report coming out of the eurozone. On Monday and in early Tuesday trading, investors were in a sour mood after German finance minister and frequent party-pooper Schaeuble tried to dampen expectations by saying that the upcoming Oct. 23 eurozone summit would not reveal a "definitive solution" to the crisis. This was a case of being overly honest and precise at a time when nerves are raw and markets jumpy.
That is, until late in Tuesday's trading session when the U.K.'s Guardian newspaper reported that French and German officials are close to expanding Europe's bailout fund from €440 billion to €2 trillion by turning it into an insurance vehicle for private investors. Shares surged in response.
Just looking at price, it looks like we're going nowhere fast. The Dow Jones Industrial Averages is at levels first reached on October 10 and has spent the rest of the time flirting with overhead resistance from its three-month trading range. But beneath the surface, there are signs that this is just the start of the powerful, multi-month uptrend I've been writing about. Here's why.
Steeping back for minute, it's important to keep the daily zig-zags in perspective because frankly all of this is getting pretty ridiculous. Clearly, Europe's officials are committed to finding a lasting solution and have realized that the key to success centers on backstopping their banks and slashing unsustainable sovereign debt loads. This realization, along with improving economic fundamentals, is the reason stocks have embraced a nearly vertical launch trajectory over the last few weeks.
Yet, markets have been reduced to huge swings based on hearsay and off-the-cuff remarks. I read a report yesterday on what Merkel's spokesperson meant when they said that "important steps" would be taken on Oct. 23 in the context of Schaeuble's call for "bold steps." This is just crazy.
The good news is that all the technical evidence suggests that Monday's weakness -- and any additional pullbacks we see this week -- will be buying opportunities within a new medium-term uptrend. Fewer stocks are participating in the pullbacks as market breadth improves, which you can see in the chart above. Economically-sensitive cyclical stocks are still demonstrating relative strength. And pessimism and fear remain high, which is a positive contrarian indicator.
In fact, demand for stocks has been so strong that the NYSE on Friday formed what's known as the Zweig breadth thrust signal. Named after famous technical analyst Martin Zweig, the signal is calculated based on the number of advancing issues divided by the number of advancing and declining issues. You then take a 10-day exponential moving average of that number. If the moving average moves from below 0.40 to above 0.615 within 10 trading days, a Zweig breadth thrust signal is given.
The translation of this signal, according to Tom McClellan of the McClellan Market Report, is that the move in breadth from low to high -- or nearly nonexistent buying demand to an overwhelming surge of interest in stocks -- reflects of flood of cash gushing into the market. That's exactly the kind of support that's needed for a sustainable rally.
These events are rare: There have only been three Zweig signals (including Friday's) since 1990.
In response, I've recommended my newsletter subscribers look at adding two high beta stocks this week: Biopharmaceutical name GTx, Inc. (GTXI) and small energy producer Toreador Resources (TRGL). I'm adding both to the Edge Letter sample portfolio.
With so much of the market now participating in the new uptrend, late coming pessimists will be looking for fast moving names to make up for lost times. As a result, stocks that have been beaten down because of bankruptcy fears or operational difficulties are given a new lease on life in environments like these -- resulting in big gains as heavy losses are reversed and short positions are covered.
These are high risk/high reward names so they might not be appropriate for all readers.
My other current recommendations still look good to go. Micron Technology (MU) is up nearly 30% since we added it on October 4. And Russian steelmaker Mechel OAO (MTL) is up nearly 25% over that time.
I found GTXI, TRGL, MU, and MTL with the help of technical screens developed with Fidelity's Wealth Lab Pro back-testing tools, which you can find here. (Editor's note: Fidelity sponsors the Investor Pro section on MSN Money.)
Disclosure: Anthony has recommend GTXI, TRGL, MU, and MTL to his newsletter subscribers.
Check out Anthony's new investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up.
The author can be contacted at anthony@edgeletter.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
14.5 billion dollars stimulus money and how much of the infrastructure did Obama rebuild ? Talk is cheap when promising the middle class anything.
ummm, no ..
"the only positive thing you can really say about investing in the stock market is that it might be better than investing in government securities which guarantee you a loss in real earnings. "
as a small firm using Tactical Asst Allocation (active investment management) be have clipped off ten percent plus per year for a decade. the world has changed the strong will change with it - including putting the buy-and-hope strategy in the dust bin. not trying to be sanctimonious or anything - but you need to hear the reality ....
further - have you heard of TIPS??? they guarantee no loss in real earnings ...
see a pro with a PROVEN track record of success and reasonable fees of one percent or less of AUM per year ...
ummm, nope ...
"Give me back 50% of my soc. security and let me live my life"
lol, your donations were spent years ago as you paid them in - it is a "pay as you go" system and they can't give you your money back because:
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