MDM - Switch to Buy at open 12/7

Published : December 7 2010 at 9:28 ET

It is an unusual occurrence when the market has a correction prompting a sell signal by either my model or IBD's (Investor Business Daily's) model, then drifts higher without a follow through day. That IBD went to a buy signal without a follow through day is a first. Indeed, these are unusual times. The action of leading stocks is important thus we continued and will continue to report on leading stocks making pocket pivots or breaking out of sound patterns through our PPR and FTS services, even after the model went from buy to sell to neutral. Studies and real-time experience show that the market's uptrend will generally be short lived without a follow through day. In fact, I dont believe there was ever a time when the market went on a full scale uptrend without a follow through day. Yes, the FTD may have occurred a week or two after the uptrend began, but never much later than that.

That said, given that these are unusual times, the model was on neutral but has switched to a buy due to the favorable tax news of extending the tax cuts. This is one of the few pieces of news that is significant as it can fuel bull markets. In addition, leading stocks have been acting well.

Note, it has never happened that the model sits on a neutral or sell signal while the market goes into a strong uptrend. However, the best stocks can begin their uptrends ahead of a buy signal issued by the model. It is a rare occurrence but did happen, for example, in March 1996. The best stocks such as IOM (Iomega) broke out of sound bases. The general market meanwhile went sideways, and didnt start its uptrend until mid-April, which was when the model switched to a buy signal on 4/16/96.

Remember, the MDM service is for ETFs. Historically, when the model has been on neutral, the market has never staged a big rally. It may go higher for a few days then either heads back down or issues a follow through day. Thus from the perspective of ETF investors, it is best to obey the model. From the perspective of stock investors, we let the stocks tell us what to do, thus continue to recommend a number of fundamentally and technically strong stocks even while the model has been on neutral.

Use fail-safe stop of 2583 or 2566 in the NASDAQ Composite to sell your ETF position(s). This will keep your losses to a minimum. Since these are unusual times, you might also consider only doing a half-position.

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