The Big Picture examined an article titled, Why Market Optimists Say This Bull Has Legs, which made the front page of the Wall Street Journal Wednesday. Barry Ritholtz named his blog post “Uh-Oh: Front Page WSJ” Why Market Optimists Say This Bull Has Legs” and says: “In the past, that has operated as a bit of a warning sign that an intermediate top was nearing.”

I first read about this post from Trader Mike’s Recent Links which is an invaluable part of my routine in scanning top blog posts and financial stories of the day.

I am not sure if this WSJ article will signal a top but I tend to agree with Barry that this type of front page coverage has a history of signaling things to come. Experienced investors know that these articles don’t signal what they are speaking about but actually the exact opposite. A contrary view of front-page publishing; based on basic human nature.

Many of you may be familiar with the old theory commonly named “Magazine Cover Indicator” which typically signals that a company’s trend will be coming to an end or pause after the CEO appears on the front page. This also seems to be true when a company decides to build a new state-of-the-art corporate facility. In any event, let’s take a look at some technical analysis to see if we believe the market may be nearing a top or a brief pause.

Looking at this first chart, we can see that the three major indexes are all up more than 20% in less than a year. I don’t see a sell signal by looking at this chart and actually like the fact that the market did take a breather in late February and March of 2007. I am not one to sell for the sake of selling but I do keep an eye on this performance chart to make sure the up-trend doesn’t extend too far without a natural pullback.

The second chart shows the NASDAQ reaching a 28% gain over a year ago which has signaled tops in the past. Eugene D. Brody, from Oppenheimer Capital, was quoted as saying: “Sell stocks whenever the market is 30% higher over a year ago”. Again, don’t sell for the sake of selling but watch for signals and major red flags. Maybe you should place physical stops instead of mental stops as we approach the quiet summer months.

Historically, June and July have been good months in pre-election years but August is usually a poor performing month according to the Stock Trader’s Almanac. Price and volume will be the ultimate barometer of the market’s condition so keep all of these things in mind but never act unless the market sends a true signal and/or confirms your beliefs.

This final image displays the weekly chart for the Dow Jones Industrial Average which has gained 30% since October 2005 and 25% since last summer. We had a brief pause in the up-trend in the summer of 2006 and then again in March of 2007 but other than that, the index has been phenomenal while setting multiple all-time highs. We are now extended from both the 50-d moving average and the 200-d moving average so look to these areas as support or violation signals. The 200-d moving average carries more weight in determining if a trend is about to reverse.

Keep this quote in mind when looking for tops and bottoms:
“You try to be greedy when others are fearful, and fearful when others are geedy”
– Warren Buffett.

When the crowd gets greedy, the top is just around the corner and I don’t think we are there just yet! Ride the trend until it ends and don’t try to predict the top.

It seems that everyone is writing about this market phenomenon over the past week so I figure I will join the party but structure my article with statistics using the help of the Stock Trader’s Almanac written by Jeffery A. Hirsch and Yale Hirsch.

For the record, I am not selling just because the calendar says May. I just wanted to shed some light on the statistical data as it interests me

Worst six months of the year begin in May:
* All data is from the DJIA from 1950 to 2005

• A $10,000 investment in the DJIA compounded to $544,323 for the period beginning in November through April over the past 56 years (termed the best six months)
• Compare this to a $272 loss; yes I said loss for the same investment in May through October (termed the worst six months)
• 44 of the 56 periods ended with a gain in the November through April period
• Only 33 periods ended with a gain versus 23 losing periods in May through October
• The average gain for the November through April period is 7.9% (56 yrs)
• The average gain for May through October is 0.3% but the period did have an overall loss of $272 as mentioned above
• The best six months gained 11,691.79 Dow points over the 56 yrs (data ends in 2005)
• The worst six months actually lost 538.98 Dow points

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