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Pullback or not?

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by Peter Switzer

Is it time to get out of the market? The short answer for the long-term investor is “no” but the longer answer for short-term player is: “I don’t know but don’t be surprised about a pullback".

I touched on this topic yesterday but thought it needed some clarification with the Aussie market hitting a 10-month high yesterday. Meanwhile, ahead of today’s close on Wall Street, US stocks were heading for seven days in a row in positive territory.

The Yanks are in two-and-half-year high territory and that always makes you suspicious that a pullback is on the way. And also yesterday I pointed out that Lance Lai thinks his triple top theory of gold, the dollars and the S&P 500 having failed to break higher on three occasions suggests a sell-off is probable.

The Nervous Nellie effect

However, despite Lai’s good track record, chartists can be beaten by a change of psychology. Economists can be beaten with their forecasts by changes in the underlying assumptions and chartists can also be KO’d by the same thing.

Looking around for something to make Lai get it wrong I look at the recent big inflow of money out of bonds into shares. The money held hostage in bonds was the Nervous Nellie effect — all those feared European debt defaults, US double-dip recessions and a China slowdown ran away from the stock market but these people are starting to comeback.

So you have the avalanche from those escaping bonds meeting the smarties like Lai who say this US stock market run up since August has gone too far. That’s the unknown but when sentiment changes for the masses it can lead to a sustained boom until something comes from left-field.

Left field events

And that’s what I think could spook the market but the problem with left-field events is that they are hard to see. That means for short-term investors timing your exit is tricky. For long-termers, it’s easy — you’re there and you buy more on dips of the market.

The point of my warning is that even though the charts from Lai have been reliable, they sometimes get frustrated by new developments. That’s why I like to take info from charts-land and add to fundamental analysis. When they both say “buy”, that’s when I’m really bullish and vice versa.

Buy the dips

In summary, I want to be in shares in 2011 because the Nervous Nellies are coming but the ride up of a stock market is never a straight line and this makes timing an entry or an exit damn hard.

Buying the dips is my strategy this year but they could come later than I expect and they could be shallower than most anticipate.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Wednesday, February 09, 2011