To many observers, forecasting the direction in which a body of stocks is about to strike out is the height of futility. Stock prices don't meander willy-nilly like fish, the fundamentalist view reasons, but rather are direct responses to measurable profit potential. But technicians had their day -- or month -- early this year, when a classic buy opportunity was revealed through a number of abstract mass-psychology signals, even as the Dow Jones Industrials were trailing down toward 1,180, the bottom of their five-month trading range.
Among the delightful surprises (at least for INC. Index followers) at that time was the relative strength within the secondary stocks -- the smaller, more volatile companies that make up such lists. Many a trading day saw over-the-counter issues buck the downward-trending Dow -- a sign that investors were looking over fallen equities and finding numerous pickings among the junior companies. Indeed, lots of youngsters revived with single-month gains of double-digit percentage increases.
One reason savvy traders were hunting in such uncultivated fields was that interest rates had fallen into single-digit returns. The money market, in which at 12% you could double your holdings in six years at little risk, now was yielding less than 9%. Traders needed to find double-digit excitement somewhere else. And aside from a few flagrant casualties, it wasn't the potential of smaller companies that had changed since '83 -- merely Wall Street's eerie sense of what their price-earnings multiples should be.
Thus, for the first time in many moons, a leadership role emerged for the INC. Index. An investor who missed the late-December buying signs ought to study this classic market turn in technical detail.