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BEING STREET SMART 

by Sy Harding

IS IT TIME TO SELL INTO THE RALLY? August 15, 2008.  

Early this year in this column I predicted it was going to be a difficult year for buy and hold investors. I suggested the best strategy for potentially making double-digit gains for the year would be to go after several smaller gains of 5% to 10% from both rallies and corrections, taking profits each time.

With the S&P 500 still down 11% for the year, and still 17% below its peak of last October, and this second rally of the year looking tired already, that still seems like the best strategy.

Of course, not everyone is interested in putting in the extra time and effort of intermediate-term trading, regardless of the potential for protecting assets and making gains. So when we were on the buy signal for the year''s first rally, which was off the March low, I suggested buy and hold investors might want to at least consider the rally as an opportunity to lighten up on their exposure at somewhat higher prices.

That rally did end, and we took downside positions for the next down-leg, which carried the market down to a lower low in early July than it had experienced at the March low. However, by that time the market was again oversold, and we took profits from the downside positions ranging from 4% to 11%. When our technical charting then provided us with another buy signal we moved significantly back into upside positions for the current rally.

However, I believe it's time to again suggest that long-term investors consider using the higher prices to lighten up some on their exposure if they didn't do so in the March rally. The prices aren't as high as they were in the rally off the March low, but they could well be higher than they will be later.

From their early July lows the rally so far has amounted to 7.5% for the blue chip Dow and S&P 500. The Nasdaq's rally has amounted to 13%, the Russell 2000's 15.8%. Those numbers are about average for summer rallies.

It is much less stressful to sell into a rising market, than to wait to do so in the panic and stress of a plunging market. (I know that from the experience we are now going through, holding a position in gold while the price plunges).

Meanwhile, there have been enough signs that the rally is getting tired that I already suggested that subscribers take some of the profits from our upside positions. That has cut us back to just 45% invested, 55% in cash.

I don't have a sell signal yet, so we're still holding onto some upside positions. But we are watching closely now and compiling a list of potential downside positions and safer havens for the next sell signal.

Among my concerns, the market has been responding primarily to the rally in the U.S. dollar, and the plunges in the price of oil and gold.

While doing so it has been ignoring the worsening situations for financial firms, with lenders now facing serious new problems, even before their old problems have been resolved.

Meanwhile, I may be wrong, but the charts I've been putting on my daily blog indicate that the spike-up in the U.S. dollar has it now overbought to a degree likely to bring a pullback to at least retest support. And oil and gold look to be very oversold on the charts, to a degree likely to bring at least an oversold rally in those areas.

If reversals in the dollar, oil, and gold do take place, the market will lose much of its support for the rally, and will have to return to consideration of the growing economic and inflation problems it has been ignoring for the last six weeks.

We are well ahead of the market and 'buy and hold' year-to-date, and expect two larger opportunities, one to the downside and one to the upside, yet to come before year-end.

So, as I said in last week's column, enjoy the rally but don't fall asleep at the switch. The next profits will probably be from the downside again before long. 

Sy Harding is President of Asset Management Research Corp., and publisher of the financial website www.StreetSmartReport.com, and the free blog www.SyHardingblog.com. He also authored the timely 1999 book Riding the Bear - How to Prosper in the Coming Bear Market, and 2007's Beating the Market the Easy Way - Seasonal Strategies that Double the Market!

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