Where We've Been

Buy to the sound of cannons, sell to the sound of trumpets," Lord Nathan Rothschild, 1810.

{Note: As I said in my 1st post, I am new at this. I had intended to post a weekly chart of the S&P 500 going back at least 3 years. The technical aspects of this is beyond me at this point. I will attach it, hopefully with annotations at a later date. Recipients of my January letter to Clients will already have a copy of this chart.}

From their highs in March, 2000-when mutual funds experienced their largest ever monthly deposits until March, 2003 at the beginning of the 2nd Gulf War-when those same funds experienced their largest ever money withdrawals, the S&P 500 lost almost 50% of its value. The Nasdaq Composite lost a stunning 75%. Both markets had found their initial bottoms in the summer of 2002, rallied and then sold back down as the winds of war percolated in the late fall and early months of 2003.

The prospect of a conflict on the back of all the events that had transpired in the previous three years proved to be too much for many investors and they sold in a final disgusted spasm of exhaustion. The market (in this I am referring to the S&P 500 hereinafter the SPX) reached its final bottom just prior to the commencement of combat. As the tanks of the American 3rd Infantry Division, broke through the Iraq's sand berms, the markets began to rally. In an 8 day period the SPX advanced almost 14%. It tacked on another 10% in a 12 day period in late April-early May and then had a nice orderly advance until early March of 2004. In that time period from it's market lows the SPX advanced over 45%.

Since that time the markets have been locked in a trading range defined loosely as a support level of 1050 at its bottom on the SPX and a resistance level at its top of 1220. This sort of trending or sideways move is neither unreasonable or undesirable after the large percentage move stocks had from their lows. Currently the SPX is trading at the same levels it first reached in January 2004. Humans measure market performance on a 12 month basis. The market moves at it's own pace and will do what it has to do to prove the most amount of people wrong. It cares not for our short or long term needs and simply knows that it has a huge move to digest.

It is still my opinion that stocks are consolidating these 2003 percentage moves and this environment could at some point set the stage for a more sustainable advance.

Lessons to take away from this:
-Markets tend to have large and violent upside moves when coming at the end of significant corrections.
-Markets tend to move opposite of what the consensus believes will happen.

A final note. Some of the terms I have introduced i.e. support and resistance may be unfamiliar to some of you. I will attempt to explain this in more detail in a future post.