A Trader’s Market or an Investor’s Market?

Is it a fragile little market after all? You can't really tell by appearances. For example, the world's largest bond insurer (MBIA) fell 27% in New York trading. It reported a $727.8 million loss in insured credit derivatives. Yes...those credit landmines are still out there.

But the proper question - if you're sitting on the fence about this move - is how broad the rally is. Are all stocks rallying? The other day, 29 of the 30 Dow components were up. Kraft was not. By the way, Kraft has gone hostile in its bid for Cadbury. This partly explains why its shares were down.

When a company makes a takeover bid, what usually happens is that the bid places a premium on the shares of the company being sought. Those shares rise.

The shares of the seeker (in this case Kraft) often fall. There's a whole school of trading (and even some hedge funds we've heard about) who arbitrage like this on takeovers. They buy the shares of the company being acquired and sell the shares of the acquirer.

That seems like a lot of work, even though it might turn a profit. You could hardly call it a long-term wealth building strategy. Anyway it's certainly not the same as looking for capital efficiency or firms with high net tangible assets selling at a discount. It's a trading strategy.

But then, that brings us back to the question. Is this a trader's market or an investor's market? One way of knowing what's really going on is looking at measures of breadth and volume. A big day in a small number of stocks can move a whole index higher. But that doesn't tell you how most stocks are travelling. So how are they travelling?

Have a look the chart below, and especially the lower part. The top part is the S&P ASX/200 over the last year. You see the market within kissing distance of a new 52-week high. But how broad is the participation? That's what the advance/decline line below shows you.

Bigcharts.com says, "The Breadth Advance/Decline Indicator is the number of advancing issues divided by the total number of both advancing and declining issues. Readings above 0.5 are considered 'bullish' while readings below 0.5 are considered 'bearish.'"

By that definition, the market action would look pretty bullish. But it also looks like the a/d ratio is just as about as high as it has been at any time in the last twelve months. And each time it is neared .75, a big correction has followed. Hmmn.

We asked our technical wizard Murray Dawes to tell us how broad the participation is in the Aussie market rally. Is it just the banks and the miners, or is everyone getting in on the action? Stay tuned for his report. And incidentally, yes, the charter offer on Slipstream Trader has now expired. But that doesn't mean membership is closed. For details, go here.

Dan Denning
for The Daily Reckoning Australia

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