Looking at the latest news, you can tell that spring has come to the financial markets. Even though the world hasn't solved all of its financial problems, and even though it appears that plenty of bad news still lies before us, investors have finally come out of hibernation, and they look like they're fishing for bargains.

But does that make now the last, best time to buy? Or are you just setting yourself up to take the fall in the next downward leg of the bear market?

Betting on 90%
Traders who use technical analysis look at any number of different indicators within the market. One indicator that has moved into the spotlight recently looks at the number of shares of stock traded on a particular day. By taking the volume of shares traded in stocks whose prices rose on a given day, and comparing it against how many shares traded in falling stocks, technical analysts try to draw conclusions about the future direction of the market. A particularly skewed result -- 90% or more in either direction -- often indicates that a stronger move in that direction is imminent.

Sound like mumbo-jumbo? Actually, compared to some less intuitive measures on which technicians rely, this one makes a fair amount of sense. On a so-called 90% up day -- which Thursday was -- trading in rising shares dominates activity in falling shares. Conversely, 90% down days feature huge interest in losers, and relatively little trading among rising stocks.

Put simply, the idea is that when stocks fall sharply, investors respond negatively to that news, threatening to push them down further. On the other hand, when stocks rise in dramatic fashion, investors often take the opportunity to jump on board during the subsequent days and weeks, fueling a rally.

That's fairly simple. But what can you do with it?

Take advantage of ups and downs
Since the March lows about four weeks ago, we've had five 90% up days. That's extremely unusual, and it's led many observers to predict the end of the bear market.

The problem, though, is that we've also had 90% up days several times in the recent past, including:

  • Sept. 30, 2008, after which the market plummeted 20% in just days.
  • Oct. 13, 2008, which represented the largest point-rise in the major market indexes ever.
  • Dec. 30, 2008, after the Nov. 20 lows, but before the big losses that opened 2009.
  • Feb. 6 and Feb. 24, immediately before the March 9 lows.

So as you can see, the metric is far from infallible. For instance, look how far down you'd be if you'd bought stocks based on the 9-to-1 up day last September:


Return Since 9/30/2008

Dow Chemical (NYSE:DOW)


Wells Fargo (NYSE:WFC)


Halliburton (NYSE:HAL)


Caterpillar (NYSE:CAT)


ConocoPhillips (NYSE:COP)


Medtronic (NYSE:MDT)


Boeing (NYSE:BA)


Source: Capital IQ, a division of Standard and Poor's.

In fact, 93 of the 100 stocks in the megacap S&P 100 Index have fallen since that day.

The lesson
I find technical analysis fascinating as a way to observe market behavior. My feeling is that if enough market participants believe that technicians can make money with their methods, then it can become a self-fulfilling prophecy.

But relying solely on technical analysis means that you'd completely ignore the fundamental qualities of a particular stock, and that seems silly. Why deprive yourself of information that could help you make an even better-informed judgment about which stocks to buy?

The real reason to buy stocks has nothing to do with 90% up days. Rather, the fact that you need a strong investing plan that will help you reach your long-term financial goals is reason enough to add stocks to your portfolio now -- especially at these low levels.

For more on how to invest for the long run, read about: