Saturday, March 31, 2007

Where From Here?

Friday's action bore a fractal-like relationship to the entire first quarter -- a wide price swing that closed about even.

Even more interesting, Friday was the second straight day that this happened. Oscillations back to mean are the hallmark of indecision, and the fractal rhythm suggests that tension is increasing, probably towards a break. Other indicators, such as a rising VIX, support this idea. It's getting tight in here.

With every shred of economic data instantaneously available world-wide, it's easy to forget that, in the end, the stock market is really about earnings and what we're willing to pay for them. Whether it's tariffs, new home sales, the Fed or the price of oil, daily volatility springs from improvised profit recalculations. The indecision we're seeing in both long- and short-range charts is likely due to uncertainty about the earnings outlook for Q1 and beyond.

The slowdown is clearly upon us, yet Standard & Poor's has announced that -- with 92% of company estimates in -- Q1 for the SPX is poised to be its 19th consecutive quarter with double-digit earnings (10.5%). Of course, an epic wall of skepticism faces both this forecast and forward guidance. As a result, neither Buyers nor Sellers are willing to commit beyond the recent narrow price levels. Instead, investors engage in the schizoid pattern of selling the rallies, then immediately buying the dips.

The daily chart below shows the indecision on a short-term level. Thu/Fri left back-to-back bull hammers on accelerating volume, but price failed to climbed back above the 50-day both times. The indexes are growing oversold and OBV is positive, but MACD is dead-in-the-water. Is the chart below printing a bull flag, or are new lows ahead for a possible W at 2350?

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So, which way will the market break from here? The truth is that there are powerfully conflicting signals. For example, leading stocks have been holding up remarkably well, and market internals throughout the past week were mixed at worst. On the other hand, the NASDAQ weekly chart below shows a descending MACD, indicating a prevailing downtrend. Also, OBV looks weak and ready to cross below trend.

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For most investors, a better question than, "which way will the market break?" is "how should I be positioned?" As the indexes sit unchanged for all their trouble in 2007, a look at the chart below shows the rewards of picking the right stocks. It's been mentioned ad nauseum, but this really is a stockpicker's market.

This chart also offers a cautionary tale about listening to the mainstream press. For months, the pundits have been touting defensive stocks like Consumer Staples and Healthcare. However, trusting the market instead of the experts would have led you to far greater gains in Utilities, Materials, Energy and even the Transports. The message here is that the best way to improve your results is to follow the money, rather than relying on the predictions of pundits.

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The monthly chart looks like March was very constructive, pointing out how indecision can create different looks depending on the time frame. The SPX monthly looks even better.

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Saavycharts, thanks for all of your contributions -- they're excellent -- and thanks as well for the question about energy/oil. Energy appears to have resumed a new leg up, though timing a decent entry is always important. Currently there's an unstable and incalculable Iran premium, and the refineries have had a very good run lately. This favors a pullback soon, and XLE looks to be starting a cup n' handle rest period at the perfect spot for a handle. Pullbacks aside, energy looks like eventually there's more upside ahead, especially for the drillers.

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Looking ahead, it looks like more chop next week, with downside risks remaining elevated. However, lots of stocks are setting up beautifully, so if you're in the right spot, you can escape a lot of pain.

Until then, have a great weekend.



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