Have investors gone mad? Is there anything to justify a 1700-point rise in the Dow Jones industrial average in just seven weeks? Has the economy improved that dramatically? No, it hasn’t.The real story is that, all along, the economy was a lot stronger than the pundits were telling investors. Reports of the collapse of corporate profits were greatly exaggerated. Asia and Latin America did not quite melt down. Add in a dramatic series of interest-rate cuts–in the U.S. and other major industrial countries–and a recharged mergers-and-acquisitions boom, and you get a market driving toward Dow 10,000.

The market’s muscle is astonishing, leaving many pros breathless. ”People were too bearish before, so there’s panic buying now,” says W. Shannon Reid, a senior portfolio manager at First Capital Group in Charlotte, N.C., as he watched the Dow gain nearly 215 points on Nov. 23. ”It looks like a melt-up.” Indeed, the sheer momentum of the market’s comeback has heads spinning. Ralph J. Acampora, the market technician at Prudential Securities Inc., whose bearish predictions on Aug. 4 helped slice 300 points off the Dow that day, is again in the bulls’ camp. Acampora hasn’t finalized his 1999 forecast yet but says firmly that the Dow will be ”well above the 10,000 mark” next year.

This is an article from BusinessWeek in 1998, but it sounds like it was written for todays markets and possibly fit the mold by year end.

I’m reading a book by Norman Fosback called Stock Market Logic that was published in 1973. You might have heard of it.

I came across this signal he has called “two tumbles and a jump” and its based on Fed policy in regards to monetary easing.

How it works: When either the discount rate, the banking reserve requirement, or the margin requirement are lowered twice after an increase, the market usually makes big gains.

Since the Fed has already cut the discount rate. We have 1 half of this signal in the bag. It is highly likely that the Fed will cut one of the three items this Tuesday. The media and other noise in the market is asking the same question, “How much will they cut?” The answer is it doesn’t matter. The story about how much or how little won’t make a difference because it will all matter in what they say what position they take for the near term future. Tuesday might be one of the most telegraphed signals we’ve ever seen.

Ok how about statistics on how this signal has performed.

Twenty calendar days after the signal, the S&P 500 is usually up an average of 4%. According to Fosback, the average S&P gain after three months is 11%; after six months, 15.9%, and after one year, 29.7%. Fosback says the two-tumbles signal is most effective in the six-month and yearly intervals. In 18 of 19 times, returns have been positive.

Back in 1998 we also had the Nasdaq take over and lead all other indexes going into the 1998 signal. We have the same scenario today.

Thanks for reading

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