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A Kumbaya Moment

05/30/2013

The two most practiced schools of investment management are fundamental analysis and technical analysis.  Mostly, I practice fundamental analysis, which means I look at the company, how its stock trades relative to the company, how the stock is rated by full-time analysts, how it is impacted by the business cycle, etc.

Sometimes, I will take a look at technical analysis.  That is the type of analysis that uses stock prices to identify meaningful patterns on a graph.  While it is interesting, it demonstrates meaningless precision.  To me, I consider it voodoo analysis.  However, when both schools suggest the same thing, it is worth paying attention.

Take a look at this technical view of the stock market:

Chart of the Day
On an inflation-adjusted basis, the Dow is not even close to the red resistance line, which means it will probably continue going up.  When technical analysis confirms what I study in fundamental analysis, I feel pretty confident indeed.

That doesn’t mean there won’t be corrections.  There was a 3% correction in April.  And, don’t forget, two out of every three years experience a correction of 10% or more.  Corrections are routine and actually good for the stock market.  Long term, I remain much more concerned about a “heart attack” in the derivatives market than the business cycle.  So, let’s just enjoy the short term!

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