Stocks Market: 2010 and Beyond '" the New Reality

Small caps are out after almost a decade of wild gains. Large caps have been flat for a decade. That's a good starting place if some of those large caps start reporting better earnings.

Many large techs have not moved since 2000 and are just beginning to emerge out of multi-year dormancy. They are cheap and reporting huge earnings gains but investors are skeptical: "How long will this technology upgrade last when we are on the brink of a double-dip or in a secular bear market?" When oils and steels began to report huge earnings gains in 2004, many investors did not believe those numbers: "How long can these price hikes last? These industries are highly cyclical!" Yet oils and steels led for 4 years. Prior to 2004, oils and steels languished for a decade.

These are not predictions but rather reflections on current trends. Technically, the long-forgotten large caps have flat multi-year bases and techs are the only ones making higher highs and higher lows.

New Ways to Trade

- We can't expect runs entirely above the 50 day moving average (DMA) from larger caps - they are just too big and heavy. Many of them rise, kissing or hugging the 50 DMA. If you trade large caps like small caps, you will be constantly buying high and selling low. Larger caps may need looser stops below key support areas regardless of whether those are above or below the 50 DMA.

- Many recent breakouts fail. Looser stops and failed breakouts mean larger allowances for losses. Multiple smaller positions may have to be carried for longer periods of time to limit dollar losses while allowing room for growth.

- Many stocks have loose or unusual chart patterns compared to 2003 - 2007, although most of them have been known since the 30s. Slower moving larger caps in looser patterns may mean less emphasis on precise pivots and more on the overall trend.

- Zoomer distribution is not linear. When a trend is firmly in place, powerful breakouts abound. During periods of uncertainty we either have few zoomers or a high breakout failure rate.

What if We Are In a Secular Bear Market?

Or at least going into a double dip recession?

Sticking with higher highs and higher lows means that you will be out with minor losses as soon as the direction changes. But:

DXD, SDS and QID suggest the worst is over, at least for now.

Most recessions are presaged by an inverted yield curve. The yield curve today is the steepest in a decade, suggesting the opposite.

Banks not lending? Would you if you could borrow from the government at 0% and buy Treasuries yielding 4%?

10% unemployment? That's a drag but historically 5% unemployment has been considered full employment in a dynamic capitalist economy because there are always displacements and dislocations, so only 5% are chronically out of work. 95% are doing just fine. They may have to work a little harder but - hey! - nobody said it was supposed to be easy.

Looming deficits and inflation? That's only when we are not worrying about deflation. But businesses were profitable when short term interest rates were at 10% - remember those 10% money market yields? The world didn't end back then.

Every recession since the Great Depression, including the 1987 stock market crash, was supposed to take us into an even greater Great Depression, but didn't. Statistically, where we are right now is more likely to be just another spot on the stock market continuum than a historical reversal pivot.