Ride the Wave, But Take Some Profits

by George Leong, B. Comm.

For those trading the long side of the market, it has been an excellent ride since the March test of the bottom. The rally has been steady and managed to avoid any major sell-off in that time. On Monday, markets made another strong upside move, the third straight up session. There were several key technical breaks, including the NASDAQ at 1,800 and the DOW at 8,700 on extremely strong market breadth and investor sentiment. Over the last month, we have seen bullish investor sentiment carry the markets higher and hold. The key breakout levels were NASDAQ at 1,700, DOW at 8,400, S&P 500 at 900-950, and the Russell 2000 at 475.

Technology continues to be the market driver in 2009. After being down over 10% earlier this year, the NASDAQ is now up close to 16% and is easily outperforming the S&P 500 and Russell 2000, both up just over four percent. The blue-chip DOW is on the verge of moving into positive territory.

Trading volume has been on the rise, indicating increased interest in stocks and cash waiting to come in. There is lots of cash on the sidelines that is beginning to filter into the market.

Clearly, it seems more likely that the bottom was in March. The
economic condition, while still struggling, has been showing some positive signs over the past month, as stimulus money filters through the economy and borrowing rates continue at historical lows of 0.0% to 0.25%.

The Federal Reserve believes that gross domestic product (GDP) will turn positive sometime later this year, but the strength of the recovery will largely depend on the jobs and housing market in the country, along with the global economies in major regions such as China and Europe. My best estimate is that GDP will not likely pick up until late this year or 2010. This is the best-case scenario, but, as I have said, there needs to be lots of help from the global economies in order for the U.S. to make strong gains in its GDP.

The current upward move in commodities is a reflection of optimism towards the global economies. Oil has been on a nice uptrend and is approaching $70.00 a barrel on optimism towards the global economies. The moves from the Organization of Petroleum Exporting Countries (OPEC) to cut production on several occasions, in order to bid up world oil prices, are working. Yet, as I have said, it was a greedy move from OPEC during a time of economic inactivity and I still feel this is the case. The rise in the costs of energy and gasoline is not what you want to see in a recession.

The CRB Spot Index, a measure of 22 commodities, is continuing to trend higher at above 250. The CRB is indicating that the economies in the U.S. and globally are setting up for a turnaround, as the basket of key commodities is showing some signs of turning up.

For the time being, I advise riding the upward wave, as long as the key breakout levels are held. But, along the way, you may want to take some profits off the table, which is a good portfolio management strategy.