Thursday, January 18, 2007
Dow SELL SELL SELL?
Dow SELL SELL SELL?
New year is long gone and the buying that pushes the market upwards has left with it. Most people who sold positions to take the tax break have all ready done so and if necessary or desired, they’ve probably taken stake yet again.
On the last trading day of 2006, 4.8 billion shares traded hands. The US Tax system allows investors to sell out of a losing trade and use it as a loss against earnings in the markets. This is one way that investors can avoid, at least in the US, paying 15% on their gains by taking losses early. If you have a significant amount of losses in one year it is worth it to sell out and re-buy. It wouldn’t be worth it on a sum less than a thousand dollars or so because of commissions plus the time involved. Nope, no way, not worth saving $100 to uncle sam if you have to spend $50 to do it and put in a few hours of tax prep.
The January effect is, well, over. Celebrations are done, its time to put up the champagne and go on with 2007 like it is any ordinary year. Let’s dissect a chart of the Dow for the last two years. (This does include 2007, it’s 2 years as in 730 days, not two full years.)
First thing that I think when I see this chart was that 2006 was definitely a good year for the markets. Although we’re still lagging the triple digit gains in Asia but hey who’s counting, a year like this hasn’t come in far too long.
As we know though is that after the party comes the crash. I don’t mean crash as in an absolute fallout but I think we should expect to see at least SOME correction in the markets. 500 points or so?
When looking at the chart a clear trend can also be found. It’s obvious that 2006 was a smooth and steady rise to the top, some ups and downs were in the mix but overall it was a consistent and measurable pace.
As with all good trends, these trends for the most part show some age and with age comes credibility. The majority of key trendlines are currently above the price of the Dow, showing a strong resistance against any future rises. Good news for the dow though that the lines are moving upward, not downward so even if the price starts to fall in the trend, its price overall could be rising. Falling to the bottom of the channel three months from now would mean that the price of the Dow actually went up.
This isn’t a call to move your money out of the markets, but if you plan to move money into an index fund based on the Dow 30 I would suggest waiting for the price to drop a little bit. Wake up! We’re coming off record highs, and it shouldn’t be expected that the index continues to post these new highs.
If you’re already invested, GREAT, stay in the market. Its not worth it to exit then get back in. If you’re feeling like risking some money though for a decent prospect at a gain, I would suggest buying some futures!
In the game of roulette I would suggest to you never play a color because the opposite has come up 20 times in a row. If black comes up 50 times in a row, the chance that it will be black next time is still 50/50 (minus the 0s mind you). Roulette wheels have no memory or pattern, but as technical analysts would tell you, humans do!
I’ll elaborate on this idea fully tomorrow but basically investors will notice when highs are made and establish that this is probably the highest the index will go. Then a sell off occurs and the index drops from its high.
When I hear “new high” I also think “new top” and I guarantee I’m not the only investor that makes this connection, whether consciously or not. People who believe strongly in the use of trend lines will be more likely to sell out at a top because a price is reaching unrecorded territory.
History tells the future but without historical data it is impossible to chart the future. I would hold off on buying the Dow and just sit back and watch how it tops. Its going to top soon. The formation of the top will tell us a lot about its prospects for again flying high to new highs.