Stocks finally made good on growing internal weakness and tumbled on Monday.
The slide wiped out most of last week's gains, and may be the start of something serious. However, in truth it's too early to tell, as both the indexes and leading stocks remain in strong uptrends.
As you'd expect on a red candle day, market internals were poor. 7 stocks fell for every 3 that went up, and 8 out of every 10 shares traded was a sell. New Highs hung tough at 400, but the ratio over New Lows slipped to about 3-to-1.
NYSE volume accelerated 14%, marking a clear distribution day for the blue chip exchange. However, one surprising feature of Monday's session was the lack of NASDAQ volume. While the Composite slid a hefty 32 points, volume was just 0.06% higher than Friday (not even 1/10th of a percent). The NDX had a similar price move, but volume actually fell!
Many stocks saw their bids pulled in the afternoon, leaving them to slide lower on surprisingly light volume. For example, tech stocks such as INTC, GOOG, AAPL, FLEX, BEAS, RIMM, QCOM and dozens of others slipped on low trade. The Transports also fell on low volume, easily seen in leaders such as PCAR, EXPD and CHRW. In all, just 16 stocks on the NDX printed distribution days, an unusually low number for a 1.2% decline.
The IBD100 had a bad day, but certainly no worse than its peers. While the RUT fell 1.8%, the small-cap heavy IBD100 slipped 1.9%. About 1/3 of the IBD100 printed distribution days, the same as the Dow.
How far will the Composite slide? A trip down to the 50-day/Fib 62 would be a 3.5% pullback from Friday's high. For the record, a 10% correction literally takes us off the chart to about 2300. Regardless, the odds favor more downside ahead.
NASI is one of the original poor-man timing indicators, and SAR flipped to a Sell on Monday.
While the selling lacked intensity, it certainly was widespread. Every sector did poorly, though a continuing surprise is the weak action in gold and silver. The XAU did worse than most sectors on Monday -- including Financials, Tech and Healthcare -- and slipped below its 200-day.
As the market seems poised at the brink of collapse, the bond market further discounted the chances of a recession. While the 2-year/10-year curve has been repaired for over 5 weeks, the more finicky 3-month/10-year inversion is steadily moving in the right direction as well.
Finally, as bombs fall all around, the TOF Ratio -- like the IBD100 -- continues to hang in there.
Into every life a little rain must fall, and it looks like May 1 could bring more showers.
Until then, have a great evening.
Monday, April 30, 2007
Stocks finally made good on growing internal weakness and tumbled on Monday.
One of the better financial blogs, Kevin's Market Blog, is officially no more. According to his farewell post, a busy schedule made it impossible for Kevin to continue. Blogging is a tough avocation, and I deal with a time-poor lifestyle myself. It's easy for me to empathize with his decision.
KMB was a personal favorite of mine and a part of my daily reading habit. Kevin has a remarkable instinct for stocks and maintained a very lucid approach in talking about them. His street cred was also very high: he made calls, but when they went against him, he talked openly about it.
Kevin, you'll be missed, and I can only hope the bug to write will return someday soon. Until then, I wish you every happiness and success.
Thanks for everything.
Posted by dk at 9:04 AM
Sunday, April 29, 2007
Hot air must have lifted the markets higher on Friday, because it certainly wasn't breadth or volume.
For the second straight session, the NASDAQ and Dow squeaked out record highs on declining volume and breadth. This is as close to an engraved invitation to a pullback as the market provides. That said, how much of a pullback is another thing altogether.
The bears have a compelling case. We're at month's end, and that "month" also happens to be May. Throw in Dow 13K and there's lots of reasons to go away in May this year. After the shaky GDP data, the ongoing housing woes, etc., several pundits are predicting a strong seasonal selloff.
On the other hand, the market itself suggests something different. Regardless of what the prognosticators are saying, there are few genuine signs that the big money is ready to pull the plug and go home. Things could easily change in just a few sessions, but for now the market itself reads as pullback, yes; selloff, no.
Remember that investor sentiment -- whether measured by Hulbert, AAII, lowrisk, Ticker Sense or even the VIX -- is more cautious now than it was in late Feb, even though earnings have surprised and the market is back above its Feb peak. A <4% dip could prove irresistible for those tardy, cautious investors to step back in.
It will be interesting to see where the market stands next Friday, and especially how we got there.
Getting back to market internals, Friday's action raises a great question: how can the indexes move higher on day that 6-out-of-10 stocks move lower? It's a living example of the distortion caused by index weighting. On Friday, the cap-weighted NDX added 0.08%, but an equal-weight ETF version of the NDX (QQEW) lost 0.41%. The indexes are just part of the picture, with market internals being essential to a complete understanding of the market's overall health. For the record, the IBD100 kept pace with the broader market (a good thing), slipping just 0.3%.
The chart below looks ripe for a pullback, but it's hardly telegraphing an immanent sleigh ride down to the 50-day either.
The weekly chart clearly shows the impressive strength of this market. Volume has continuously accelerated, trend strength is now ascending, and MACD had a positive crossover this week.
One of the biggest problems with the current market are the Banks. While the broader market is back above its pre-correction highs, the BKX isn't. The less rate-sensitive Brokers are in much better shape and sit just 3% off a new all-time high, a good sign. If the market is going to fall apart in the weeks ahead, the BKX will likely be the first to go and will lead the way down. For now, it continues to hang in there and bounced nicely off its 10-week.
Technology had a decent week. The NDX clobbered the rest of the indexes and rallied 2.5% to a 6-year high on very strong volume. The SOX broke above 9-month resistance to close at a 52-week high, as did Networking. Currently, Software, Networking, Semis and Internet are all under noticeable accumulation. Below is the NDX and the SOX.
It could be a bumpy ride for investors this week. The key thing to watch -- both on the indexes and with the stocks you own -- is the downside volume. If stocks fall under the weight of huge volume, ignore at your own risk. Otherwise, the odds favor a healthy pullback. Regardless, everyone's stomach for risk is different, so please season to taste.
I'm on the road Thursday-Monday, but should be able to check in as usual.
Hope you've had a great weekend, and best of luck this week!
Posted by dk at 4:35 PM
Friday, April 27, 2007
Analysts have little experience processing charts like the one below. Instead of evolutionary growth, it depicts revolutionary growth, and revolutions defy quantification.
If you've ever wondered what a mathematical rendering of the iPod would look like, below is your answer. The most compelling thing is that the iPhone will likely be even bigger than the iPod, and their speedy, Intel-based, Vista-able computers will enjoy market share expansion during the next tech cycle.
One of technology's true innovators, things look very positive for Apple, Inc.
Posted by dk at 10:44 AM
Thursday, April 26, 2007
Stephen Hawking and the stock market had something in common on Thursday: both floated in zero-gravity.
If you felt that your portfolio wasn't quite keeping up with the market on Thursday, you weren't alone. Even though all of the major indexes tagged new highs, breadth was negative on both exchanges. About 4 stocks fell for every 3 that rose on the NYSE Thursday. While Up Volume exceeded Down Volume on the NASDAQ, even that was negative on the NYSE. New Highs did outpace New Lows 513-93, but ahead of tomorrow's GDP report, a fair amount of profit-taking was going on today.
For now, Thursday's mixed internals offer little cause for concern. The IBD100 bucked the trend and had a strong day, adding 0.6% as 52 of 100 stocks moved higher. Most telling were the record highs -- a whopping 25 today. When the market's trending, anywhere from 8 to 12 daily record highs for the IBD100 is normal. Good earnings and guidance continues to be rewarded, a healthy sign.
Eventually profit-taking is going to hit the market, but fortunately the chart below has room to give. Fridays are known for profit sweeps, but last Friday shows that short-term calls are tough to get right.
On a day that saw RYL, BZH and PHM all decide to no longer offer guidance for 2007, the Housing Index rallied. Go figure. According to Bloomberg, positive guidance from a single builder -- MTH -- caused the whole group to go up. Really? Are we sure it wasn't Stephen Hawking's zero-G experience? I have no edge in the housing game, but it's fascinating to watch. Given the dreadful housing news everywhere you look, days like this can drive the bears nuts.
Something else that drove the bears nuts on Thursday were the precious metals. A common bear trade these days is to short the indexes, short housing and go long gold and silver. This has been a very tough trade this week, and today's action didn't make it any better.
NEM came out with poor numbers, and there's a lot of buzz about an IT rebound in the US dollar. Both are PM negative, and you can see the speculators unwinding their positions in the chart below. The XAU sliced through its 50-day on Thursday after recently failing to take out a triple top. Yuk.
While profit-taking hit the blue chips, select tech sectors actually had a decent day. Software and Networking are now at multi-year highs. The SOX keeps making new 52-week highs, and Internets aren't far behind. While the Tech Ratio shows it's too early for a cyclical tech upswing, specific tech sectors are seeing noticeable accumulation. Below is the SOX, which has been higher 6 of the past 7 sessions.
The AAII Bull Ratio came out today, and it shows that Dow 13,000 was greeted with skepticism by investors this week. Surprisingly, the Bull Ratio fell, a contrarian bullish reaction in the wake of record highs and decent earnings. The strength is making investors feel uncomfortable, and that's good for the market. The last thing this market needs is for everyone suddenly to become bullish.
The Hulbert Sentiment Index (HSNSI) is saying similar things. The HSNSI actually ticked higher to 42.2% from last week's 34.1%. This shows optimism, but is hardly the heat of wild abandon. On Feb 26 -- right before the correction -- the HSNSI clocked in much hotter at 62.4%. However, the Dow was 4% lower than it is now. In a nutshell, sentiment -- by all of the metrics -- remains contrarian bullish.
It's been a good run for stocks, and I suspect profit-taking will arrive in various forms soon enough. As long as volume eases on down days, a healthy process is underway. A massive distribution day -- like on the preliminary GDP report tomorrow -- would be a skunk at a lawn party for this market.
MSFT is up 4%+ as I write, so apparently any tumble won't be the fault of Vista.
Until tomorrow, have a great evening.
Posted by dk at 4:36 PM
It's been 7 tough years since tech stocks peaked in 2000. However, the Composite and NDX are back at new 6 1/2-year highs and popular tech names such as AAPL, AMZN, INTC, GOOG and many others are all showing strong results. Does this mean that it's finally time to buy tech stocks again?
Analyst comments are one approach to answering this question. However, when it comes to your money, the market itself typically offers a less partisan view. Fortunately, ratio charts can be particularly helpful in sorting out these types of questions.
Below is a 7-year ratio of the Dow Jones US Technology Index ($DJUSTC) and the NASDAQ. The $DJUSTC is made up of 212 component stocks across all tech sectors and market-caps. This diversity gives it an advantage over the NDX, which is only about 70% tech and strictly large-cap.
In a nutshell, when the Tech Ratio is climbing, tech stocks are outperforming the NASDAQ. Once it moves high enough, the market itself -- and not some analyst -- is telling investors that conditions for tech stocks have become favorable again.
The chart below shows that even though October 2002 was the bottom for the broader market, it certainly wasn't for technology. After falling together for 3 years, the NASDAQ and the Tech Ratio diverged in early 2003. The NASDAQ continued to improve, but tech stocks kept falling. It's surprising to see that -- relative to the rest of the market -- technology didn't actually put in a convincing bottom until just this past summer after the May 2006 correction.
The inverted H&S pattern looks promising, but from this perspective tech is clearly not yet out-of-the-woods. A good first step would be to climb back above the 40-week.
The chart below zooms in on the past 12 months. After the strong rally off the summer 2006 bottom, tech stocks peaked in Oct, but have steadily weakened ever since. The Tech Ratio is back above its 50-day, but the more formidable 7-month trendline lies just ahead.
While the NASDAQ and NDX have improved dramatically -- and individual names can be attractive buys -- the Tech Ratio shows that technology as a whole continues to be weaker than the broader market. Until the Ratio pushes through important resistance, it's too early to make a broad Buy call on tech. Since we all know many individual stocks are doing well, this chart is also a good reminder of just what a stockpicker's market this really is.
As a final point, skeptics often stress that the market is vulnerable because of the obvious non-performance by tech stocks. However, the NASDAQ has reached 6 1/2-year highs without the help of technology.
Imagine what's going to happen once the next cyclical tech phase finally kicks in.
As things develop with the Tech Ratio, I'll keep you posted.
Posted by dk at 8:01 AM
Wednesday, April 25, 2007
As stocks set records on Wednesday, bear blogs had a fresh twist on the famous seasonal axiom:
13K, now go away!
Unfortunately, if Q1 earnings and the economic data are any indication, it's unlikely to be that easy. Eventually stocks will come down of course -- and maybe even reclaim 12,xxx -- but short of some tectonic upheaval, those pullbacks are likely to be bought.
Stocks have had a bullish bias almost immediately after bottoming in March, and that continued today. Market internals were excellent, led by New Highs outperforming New Lows a whopping 602-69. On a day like today, a High-Low ratio of 9-to-1 is an encouraging, confirming sign. The market's appetite for risk is healthy.
The IBD100 returned to its leading ways, rallying 1.3% as 76 of 100 stocks posted gains. In another solid sign, 22 stocks printed record highs. It's worth noting that the IBD100 -- like the TOF Ratio -- continues to be one of those market indicators with an unusually high success record. Since IBD100 performance data isn't published, monitoring it is a hand-crafted process. As regular readers of these posts know, it's worth every minute.
The chart below shows that institutions are bringing the heat. Volume accelerated another 18% (on top of Tuesday's 16% pickup) as big money left their conspicuous footprints. As the NASDAQ printed a new 6 1/2-year high, all of the technical indicators point to further gains.
While the NASDAQ looks great, it's worth noting that the NDX looks even better. Volume swelled an eye-popping 30% as the NDX outran every other index on Wednesday. More importantly, each technical indicator on the chart below looks noticeably stronger than its corresponding indicator on the Composite. This is bullish, and also very depressing for QID longs.
Speaking of volume, the Composite volume chart below shows that the 50-day hit a new 5-week high on Wednesday. It's also begun accelerating again as the market climbs, a mandatory requirement for rally longevity.
This week's investor sentiment surveys from both lowrisk.com and AAII showed that the recent market strength finally made an impression on individual investors. Both surveys saw upticks in bullish sentiment. lowrisk.com climbed to 43% bullish/43% bearish, an 8-week high.
However, the TickerSense blogger survey reveals that bloggers -- mostly pros -- tilted noticeably bearish last week. The TickerSense survey has a bearish slant anyway, but seeing such a marked shift on a week that saw record highs and a Dow Theory confirmation is very surprising. It's also contrarian bullish. I'm very curious to see how next week's survey digests the current action.
Yesterday, option investors got spooked and fled heavily to puts. This relaxed the TOF Ratio, setting it up for today's near-perfection bounce-back. It's a little hot, but the Stoch (39) shows it has room to run further.
Days like today reveal the virtues of following the ball. Investors make fun of the expression, but in truth it's very difficult to stay in a position until the market clearly tells you to exit. The market and the economy often give conflicting signals, which can really tweak one's thinking.
Soon enough, stocks on the IBD100 will start falling apart for no apparent reason. On a day that the NASDAQ slides 1.4%, the IBD100 will tumble 3.1%. By then, the TOF Ratio will likely be very shaky as well. Then it will be time to follow the ball in another direction.
Until then, have a great evening. Tomorrow we get to see how much mojo AAPL, BA and QCOM have, and whether MSFT can extend what INTC, GOOG, AMZN and AAPL have started. Employment numbers add to the mix of what could be another lively session.
Posted by dk at 6:00 PM
As Dow 13,000 stories abound, Dow theorists everywhere are quietly tapping their slide rules in appreciation of another, perhaps more significant milestone.
For the second time in 9 years, a trifecta of new all-time highs on the Dow, Transports and Utilities is confirming the Dow Theory signal that first re-appeared on Friday for the first time since 1998.
A close at record levels is, of course, le reél affaire, but considering all the 13K fireworks, it's worth an intraday note nonetheless.
Posted by dk at 9:47 AM
Tuesday, April 24, 2007
Buyers and sellers pounded it out today, with no clean knockdowns on either side.
Sellers dominated early, but dip buyers stepped in to rally stocks well off their lows as Composite volume accelerated 19%. This is bullish behavior, although mixed internals show it wasn't a solid win. While breadth was negative, Up Volume beat Down Volume and New Highs sailed past New Lows, 373-97. It's a close call, but in light of that long tail on the chart below, Tuesday edged to the bulls.
The IBD100 told an interesting tale. It lagged the broader market, sliding 0.7% as just 35 stocks moved higher. However, 6 stocks had completely horrific days: UCTT and IIVI each tumbled 19%+ on misses. Ouch. However, these 6 stocks accounted for all of the losses on the IBD100 on Tuesday. If you back out the bottom 6, amazingly the IBD100 would have posted a gain. Thermonuclear implosions aside, leading stocks continue to hold up well, and no key breakouts are failing for random, unexplained reasons.
OBV got its up day, and that long tail on strong volume is bullish. Technically, the Composite continues to look OK.
Another bright spot in Tuesday's action was that the Banks pulled a nice bounce off their 50-day. Nothing goes straight up, but when it's time to go down, style points count.
About seven sessions ago, Commodities began looking very wobbly, and one-by-one, the action took me out of almost all of my energy stocks. The CRB is perched bearishly at its 50-day, looking like it's ready to jump lower. If you'll recall, the broader market capitalized on Commodity weakness last summer and fall. Keep an eye on oil, PMs, etc. over the next few sessions to see how it impacts the broader market. Energy gets inventory numbers on Wednesday morning.
Though Semiconductors are hardly out of the woods, it was a great day for the SOX. The chip index printed a 52-week high and briefly pushed through 500 on Tuesday. Should the semis continue to see accumulation, the broader market may eventually benefit from their strength. At this point, it's still a very big if.
Amazon's numbers tonight continue the broader theme that Q1 earnings aren't any cause for widespread hara-kiri. However, tomorrow we get a fresh round of reports, plus data on manufacturing, housing and the Fed's Little Beige Book.
Lot's of stuff for investors to react to, which sure beats the alternative.
Until then, have a great evening.
Posted by dk at 3:34 PM
Doesn't Larry Wilcox look like John Krasinski from "The Office"?
So far on Tuesday, the chips are making good on Monday evening's positive TXN report. Below is the SOX weekly, which clearly shows Tuesday's important break above 6-month resistance to a new 52-week high. Gotta love the upcurling MACD.
Apparently, it's going to take more than sluggish Asian and European markets, weak consumer sentiment and poor housing data to bring this market down.
In a familiar pattern, a day of earnings leaders stealing the show is followed by a day of laggards catching a bid. Overhead, the broader indexes paddle along. This is exactly the action that propelled the markets higher in Mar-Apr, so let's see if it continues to produce results.
Up over 500.
Posted by dk at 9:08 AM
Monday, April 23, 2007
Very swamped tonight, but wanted to drop a quick note to say that stocks behaved well today. The small pullback on lower volume was near-perfect action on an OE Monday.
As noted earlier, the best part was that the IBD100 had a solid day, up 0.7% as 60 stocks moved higher. On a pullback day, you couldn't asked for a better sign that bullish spirits are alive and well.
The mainstream press said that stocks slipped on higher oil prices, but energy stocks had a very muted day. Also, the Transports eased on light trade, so I'm not so sure. Based on volume market-wide, looked like good-old-fashioned profit-taking to me.
Nearly 1/3 of the SPX reports earnings this week, which means that by Friday, the market should have a decent grasp of Q1 earnings. The big question tonight is whether the TXN report can goose the SOX tomorrow. Chips breaking through resistance would be a breath of fresh air for this currently tech-challenged market.
Until tomorrow, have a great evening.
We need an up day tomorrow to protect OBV, but other than that, this is a great looking chart tonight on many levels. The Composite could continue to trade sideways for a while without suffering meaningful technical damage (though that certainly wouldn't be as much fun).
Posted by dk at 5:14 PM
While the broader market is flat today, the IBD100 is under serious accumulation and up over 1%. Amazingly, over 50 stocks on the IBD100 are breaking out of some type of consolidation, and 32 of those are printing record highs. That's a big number of new highs on a flat market day.
Obviously there are no guarantees, but historically these types of IBD100 stealth rallies have been bullish for the broader market.
They certainly were in March.
Posted by dk at 10:32 AM
Sunday, April 22, 2007
As everyone weighs the pros and cons of this market, it's worth noting that both the NASDAQ and OEX are working through critical Fibonacci levels. Both charts have bullish implications for stocks.
The OEX is sending the strongest message. The biggest of the big, the OEX has been the blue chip laggard since 2002. However, the OEX broke to 6-year highs this week. Even better, it pushed through Fib 62 at the same time, When approached from below as the OEX has done, Fib 62 is regarded as beginning the "home stretch" of the epic Fib odyssey. This zone generally offers less resistance (the OEX fell through it in just 4 months), and price often accelerates upward from there (don't get too excited: we're talking MONTHS here). Note that the various technical indicators - Stoch, ADX, CCI and MFI -- look ready for a continued push higher.
The NASDAQ sits just beneath Fib 38, which is another key level. The Composite has -- more or less -- made two prior attempts at Fib 38 this year, and has been denied both times. Should it break above -- and the odds look good -- this turns over a whole new leaf for the NASDAQ. Like the OEX, various technical indicators support the idea of a fresh round of gains.
Nothing goes straight up, but these charts suggest that any dips will eventually be bought.
Posted by dk at 11:15 AM
Saturday, April 21, 2007
The market was actually looking pretty good to me until I noticed Abby Joseph Cohen on CNBC Friday afternoon. Now I know for sure that the top is finally in.
Seriously, the best thing about Friday's action was that the indexes rallied from the inside out. After days of dreadful internals, stocks hit record highs on strong breadth and buy volume. Also, New Highs outnumbered New Lows by a very impressive 507-65. If you want to set some records, this is how you want to do it.
Even better, investors re-discovered their appetite for leading stocks. The IBD100 beat the broader market on Friday -- including the spunky Dow -- adding 1.3% as 77 of 100 stocks moved up. 16 stocks notched record highs, a solid number considering the IBD100 sloshed through a week of sub-par performance. The SPX was up 2.2% for the week, while the IBD100 added just 0.5%.
Volume slipped very slightly on Friday, though the chart below still looks excellent. MACD is very strong, some of the daily overbought conditions have eased, OBV bounced, and trend strength (ADX) is bottoming. If the sentiment indicators were correct, a week ago most investors didn't anticipate the NASDAQ at these levels this weekend.
The weekly chart clears out the noise and actually looks even better. Volume accelerated this week, while ADX trend strength has started to curl upwards.
After moving higher for 5 of the past 7 weeks, the weekly NASDAQ is now very overbought. However, strong uptrends can keep a chart in this position for quite a while. For example, in 2006 the Composite stayed overbought for 3 straight months (Aug-Nov), as the index climbed over 300 points. The red, slower stochastic line still has a ways to go. MACD divergence is another thing altogether. It will be interesting to see how momentum vs. price plays out over the next several weeks.
What a difference a week makes. Last Friday, the Banks were a shaky and feverish bunch. However, tame CPI numbers and solid Bank earnings revitalized the BKX this week. The Banks are back above their 10-week average and look poised for more gains.
Markets ultimately follow the direction of the Financials. If you'll recall, the Banks shot up early in the week, helping set the tone for the broader market advance. While "Dow 13,000" stole headlines, the Banks quietly outperformed the entire US market except for one sector: the Brokers. Below are both the Banks and Brokers, thankfully this week's #1 and #2 best-performing groups.
While everyone focused on the Financials this week, the most unexpected development came from the Semiconductors. Like the Dow itself, INTC has posted gains in 15 of the past 16 sessions! Joined this week by strong performances from LLTC, TXN, MXIM and NSM, the SOX rallied up to 6-month resistance.
The SOX has tested this resistance 6 times in 6 months, and each time was dramatically turned back the very next week. The key to success for the chips is immediate follow-through. Consolidation would be OK, but the SOX will benefit most from taking out 500 as quickly as possible. Another deep selloff next week will spell trouble again, probably for the broader market as well.
When stocks are rallying, talking about Treasury yields doesn't seem very exciting. However, next to decent earnings, lower yields were one of the primary drivers of higher stock prices this week.
Tame CPI data had interest rate doves cooing about Fed cuts again. Chief bond bull Bill Gross reiterated his prediction that the Fed will cut several times this year alone to save housing. Based on the known data, I remain skeptical of this. In the current economic climate, the only thing likely to break Bernanke's resolve (other than <2% core inflation) is rising unemployment.
Nonetheless, the bond pit strengthened the entire market this week (especially the Financials), but two areas stand apart from the others.
The first is the yield curve. For recession watchers, this week's bond action was the perfect tonic for a healthy yield curve. The 2-year/10-year inversion has now been normal for 4 weeks, and even survived a big test at 1.0 (chart below). Mainstream press coverage of this remains light (Bloomberg did publish an article on April 16), and most recession hawk economists remain very unconvinced. Q1 preliminary GDP comes out next week, which will probably bring the recession discussion back to the fore again.
The second area Treasuries impacted was the Housing Index. Though I'm no housing bull, this week the HGX made a critical move. Earlier, I said that Banks and Brokers were the best performing groups this week. Actually, I "mispoke" (thanks, Alberto Gonzales). With a 5.8% gain, Housing outpaced even the Banks and Brokers.
The chart below shows that since the 2005 peak, the HGX is making a credible tour of its Fib levels. Over the past two weeks, it held at the 62% retrace, and bounced back above its 40-week. There are definitely some eager beaver investors in the builders. Regardless, it's unlikely the housing mess will be over until the most painful and financially destructive part happens: the price of homes fall. Right now, no one's buying. Like an after-holiday sale at Macy's, cutting prices hurts margins, but it stimulates demand. For now, there are no real signs prices have started to come down, and inventory continues to build.
I began this post with a contrarian joke at Abby Joseph Cohen's expense (sorry, Abby). However, it was to help make a point about the current market. Abby Cohen is the poster girl for perma-bull hubris, and her story is a cautionary tale that every investor can learn from.
The reason we know Abby Joseph Cohen is because in February, 1991 -- at Goldman-Sachs -- she made a very gutsy call. With the Dow at 2365, she cut against her peers and said that the bottom was in. She was widely criticized for this at the time, but she was dead right, and it made ga-zillionaires out of lots of investors. When the correction hit in 1998, she said to Hold, and she was right again. More ga-zillionaires.
The problem came in 2000. In March, as the market tumbled and warning signs were everywhere, Abby Cohen ignored everything and recommended a mere 5% reduction in tech (from 70% to 65% of her model portfolio). She stayed with tech all the way down (her real failing), and the rest is history.
Abby Joseph Cohen is famous to us all because she stopped following the ball.
Even for the pros, it's easy to out-think yourself. As the current market proves, following the ball is far more difficult than it looks. However, unless you learn to do it with some success, it's hard to consistently outperform the indexes.
It's VERY tempting to break ranks and make anticipitory moves. This week in The Kirk Report, Charles Kirk interviewed the popular Bloomberg columnist and money manager, John Dorfman. It's a great interview, and Dorfman quotes the famous Wall Street joke,
"What's the difference between being early and being wrong? There isn't any!"
Dorfman's point is one echoed by pros across the ages: most investors make more money following the market than trying to get out in front of it.
I have no idea what's in store for the market near-term -- and especially not long-term. Fortunately, it doesn't matter. All I need to know is that the current trend is up. That said, there are a lot of forces at play that could change this trend. The market's overbought, economic data could be bad, earnings news could sour, and who-knows-what-else could change everything. Even more ominous, the Sell-In-May chorus can be heard everywhere this weekend.
The market's trending up, but it's no time to let your guard down. Long or short, watch your basket like a hawk.
See you Monday, and I hope you're having a great weekend.
Posted by dk at 12:21 PM