Where We Are!

As of Friday's close {4/29/05} the markets have printed the following year to date declines:

Dow Jones Industrials: (- 5.5%) (- 7.2% off of its 52 week high.)
S&P 500: (- 4.5%) (- 5.9% off of its 52 week high.)
Nasdaq Composite: (-11.7%) (-12.3% off of its 52 week high.)

This grinding four month decline has brought these major averages back down to major levels of support (a price or price zone where stock buying power has historically been sufficient to halt a price decline). The back and forth up day/down day price action we have recently witnessed is often indicative of a market trying to find at least a short term bottom. Stocks have tested recent lows and held these price levels. Markets in 2005 have followed a pattern similar to that which stocks traced in 2004. If this pattern holds then it is likely that stocks should begin a short term rally back towards price levels stocks held at the beginning of this year. Certainly the investment community has a powerful incentive to get stocks back to as close to break even by the end of June. Investors tend to scrutinize their portfolios more closely at the end of June and the end of the year. Such a possibility means that the average stock could go up 5-10% between now and June 30th.

Now there is no law that says this is going to happen and all sorts of events could conspire to either limit a rally from here or stop it cold. An important event this week will be the Federal Reserve meeting on Tuesday. A benign Federal Reserve statement regarding inflation could mean more capital put to work in the markets. Any indication that they are close to being done raising interest rates could be the kindling to ignite a pretty good rally. I will be looking for clues of a rally in the reaction to this meeting and will in particular be paying attention to a few other clues which are usually indicative that stocks are going to advance. I'll fill you in on how I study and use some of these indicators in later posts. Next....Where we are going.