ON May 21, 2007, the Standard & Poor's 500 traded above its previous all-time high, which was in March 2000 at the height of the dotcom boom. Does this mean we should be fearful of a coming crash some time soon? Although a market that has been bullish for about four years can create some amount of anxiety amid market participants, the underlying conditions of this market are very different from the one we experienced during the dotcom era. I have to confess that the recent performance of Amazon, Inc., did bring back memories of the soaring stock market of 2000 -- but that's just one stock. The market situation is quite different now from what it was back then. US corporate profits have been steadily expanding; the US economy has been growing at a modest pace; Asian central banks have been investing in US bonds; and equities are not -- relatively speaking -- expensive. Outside of the US we are seeing European as well as emerging markets enjoying bullish enthusiasm.
In spite of these optimistic conditions, it doesn't hurt to be cautious, especially if you are a short-term trader. One factor you should keep an eye on is the VIX, the CBOE's volatility index. At the moment it is stable, with a value well below its average. Once the VIX starts rising above average and gets close to its highs, however, you do need to be alert. After all, when things are going this well it doesn't take much for fear to overtake greed.
AS we all know too well, fear and greed have a hold on the market. You'll find out all about those two emotions in the Technical Analysis of STOCKS & COMMODITIES feature article for the month, "Between Price And Volume" by Buff Pelz Dormeier. The article starts on page 20. Here you'll find out how price and volume can be used to create an indicator you can apply to help confirm a specific trend.
In addition, we also had the opportunity to interview John Netto of One Shot--One Kill Trading. His interest in trading evolved from his interest in taking high risks, which started at a very early age. He has a very interesting viewpoint on trading and to add to that, he is also a successful poker player. See how the two are similar. The interview starts on page 60.
So go ahead and take advantage of this bullish market, but keep an eye on investor sentiment and be alert to any change that could lend itself to a shift.
Originally published in the July 2007 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2007, Technical Analysis, Inc.
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