“Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble… to give way to hope, fear and greed.” Benjamin Graham

We’re going to take a break from our series on no-cost and low cost stock screeners to look at some interesting perspectives on the recent market price action.

It’s easy to get sucked into the hype that the media produces for us. And right now that hype is around the “record” move up that the stock market has made over the last couple of months. Let’s look at some math and then a chart that help to put the move into perspective.

First, the math. After an asset has dropped almost 60% in value, it’s easy to have a big percentage move up from that low price. For example, if a $10 stock drops to $4, and moves back up to $5.60, we could talk about the amazing 40% move up that it has had from its low, especially if we wanted to position things with a positive spin. Or sell newspapers or TV ad time. Or push forward an agenda.

Sure, such a move is impressive (and lucrative for those who bought near the bottom), but it really obscures what’s happening in the bigger picture. Let’s look a chart of the S&P 500 with some Fibonacci retracement lines drawn from the October 2007 highs to the March 2009 lows.

At the most basic level of analysis, we can see that this “historic” upward price move has not even come close to a 38.2% retracement (the first key level of price retracements in the Fibonacci world).

My favorite market analyst and good pal Christopher Castroviejo reminds me that even during the market crash of the late 1929 and subsequent Great Depression, there were no fewer than five rallies of 40% or greater. So this up move, while it breathes some hope into the market, is by no means definitive yet.

Would I love it if the economy righted itself and things just rocketed up from here? Sure! Economic downturns are tough on a broad range of folks, so pulling out of that would be really nice. But I’m also a realist; the economy has shown some signs of life, but I believe they are much smaller than one might expect given the truly massive and unprecedented amount of money that has been shoveled into circulation.

Next week we’ll look at this retracement move using a couple of other very interesting tools (some ratios, for example).

Until then…

Great Trading!

D. R.