Are Stocks Cheap {Part VI-To The Charts}

We gave a rough outline of seasonality in how markets trade in our follow-up regarding volatility. We'll begin our discussion about what the charts say by showing the seasonal cycles between bullish and bearish phases as measured by money flow analysis going back to 2004. This is a weekly chart pictured above so it is more compressed. Red boxes are bearish periods and green are bullish. We only went back to 2004 for this example because that's all the room we could fit on the chart.

While there is no set time for each phase to kick in you can notice the seasonal tendencies that we discussed last week in the follow-up mentioned above and on our discussion of volatility. Bear markets by and large negate these patterns but you can see how these seasonals have reasserted themselves since the market bottomed in 2009. While markets can experience some weakness at the beginning of the year, there is a strong tendency for stocks to experience a bullish trend during the first quarter of the year. This pattern looks as if it is currently repeating itself although an outside event could negate this at any time.

The next chart posted above is a daily view dating back to the beginning of the most recent bullish phase. We are currently still trading in this phase by our work. The market is over bought but that condition can exist for a longer period of time than most investors might expect. What an over bought condition says is that the probability for success of gain is lower at that level and prudence should be used when placing new investments in the market. Depending on the time frame there might be better opportunities down the road. It also says have the defensive pages from the playbook available in case things change.

Right now the seasonal patterns and the money flow analysis suggests a market that might continue to quietly trade higher over the next several months. Of course there is no law that says that this must happen as events can overtake these patterns. Friday we'll finish up this series by wrapping up each section by going through what the playbook and game plan say we ought to be thinking about given where we are in all facets of the investment cycle.

*Long ETFs related to the S&P 500 in client accounts.