Technicals are Back in the Wall Street Club

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Volatility has subsided and technical analysis as a formidable stock picking strategy is coming back to Wall Street.  Bigger investments from hedge funds and more action from banking stockpiles are making trading ranges much narrower, if not more predictable.

The End of Rogue Trading

Confidence in the market is bringing back liquidity, and it's also taking investors off their renegade views of the stock market.  Investors are no longer divided by bulls and bears and all other investment strategies.  Investors have taken the edge off and are less emotional, and now that the markets are less volatile and more range bound, the opportunity for profit continues to grow.

There's Now a Middle Ground

Throughout the recessionary time period, there was no middle ground.  You were either a permabull or permabear, and very few institutions were issuing “hold” recommendations.  Buy or sell was the only option, but now there are a myriad of choices as many companies are fairly valued and many more are undervalued.  There are still those that are over-valued, mostly those companies that expand in recession and linger during economic prosperity.

S&P Showing Strength

The S&P 500 index is a perfect barometer of stock market health.  The index is extremely broad, encompassing 500 stocks, many of which have been around for decades.  However, the technical indicators are also faring better on the index as a whole.  At 885, the S&P tends to buckle between bear and bull, and many touches to the line indicate that there are plenty of traders interested in picking up additional shares at that price, but only above it, not below it.  Likewise, the recent ascent in the markets is moving at an amazing pace, but is sustainable.  Generally movements below that of 45 degrees are sustainable in that the move up is not at a pace at which is too quick to generate tremendous selling pressure.

Holders Keep the Market up

It is people that buy and hold, not speculators, that keep stock prices higher for the long term.  By holding any number of shares, there is less supply without changing the demand for the shares.  Thus, higher stock prices result from the influx of investor interest in stocks that have little daily turnover.  Mutual funds are an extremely important element to maintaining stock prices as most investors are long term holders and often own the shares for extended periods of time.  Liquidation of mutual funds is most damaging to the stock market, and many mutual funds that experienced withdrawals played a role in keeping the stock market sinking for months on end.

Exchange-traded Funds Soak up Equity

Whether long or short, exchange-traded funds soak up equity and keep the markets stable.  Triple long and short funds help provide liquidity and ease of access to investments that were previously untouched by individual investors.  In times of crisis, the funds also acted as a stop gap to fund up municipalities and keep the bond markets moving.  When the bull market run begins again, exchange-traded funds will likely be critical to keeping stock prices moving upward.  ETFs allow easy access and bring more money into the market that often stays; as a whole, they've brought $13 billion into the market in just the first few months of the year.

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