Sunday, July 30, 2006

Bad GDP Equals Good Stock Market

The stock market charged ahead on Friday on the “good” news about the second quarter GDP, which was less than expected and less than half of the first quarter’s number. Of course, the reason it’s “good” news is that surely the Fed can stop raising rates with all the negative news out about the economy. We’re wondering how many “Fed is done” rallies the market can produce, especially since the Fed hasn’t actually stopped raising rates. We’re also wondering why a poor GDP number is supposed be good news. Such is the twisted logic of the stock market these days.

One thing we noticed is that as strong a day the market had in terms of price, the volume was not as strong as you would like to see given the magnitude of the price move. This is typical of a corrective wave, which is what we think. The other item of note is the QQQQ’s price action. We notice that the big move up has left the QQQQ’s Below their June LOWS. So, the bulls are getting all lathered up for a big move but the overhead supply is going to very heavy. (Editor’s note: Overhead supply means that a lot of stock has recently traded at prices above the current price and those owners want to get out even. When the prices get back to where they bought, they will become sellers and create a supply ceiling.)

As you know by reading previous days’ posts, we have gone short again after a little bullish period. We were expecting a rally to take us into this week and then we were going to reverse course but we went early…again. This means that we were pinched by the big Friday, bad GDP number, 37th “Fed is done” rally. As it stands this evening, we are ok with being short again but we could have had better prices Friday. Since you didn’t have a crystal ball when we turned course you could have gotten better prices for those inverse funds than we did. We do still have some dry powder to take advantage of any further price increases this week.

Barron’s reminded us this weekend that the NASDAQ Comp index crossed 2000 for the first time back in July of 1998 and right now that index is trading just above 2000. The point of the article was that the NASDAQ was supposed to be all of the companies in the great growth engine but here we are after a round trip from 2000 to over 5000 back to 2000 and what have we got to show for eight years—no price increase.

The upcoming week offers the jobs’ report on Friday which to us is the biggest event of the week. Tuesday is filled with new data, with the most important one to us being the June pending home sales. We continue to watch housing for clues to unwinding of the great credit bubble.

The last item on our minds is the position of our short term momentum indicators. They are generally overbought as of Friday. One of our favorites is the 5 day upside volume indicator which is near all time highs and signaling at least a minor pullback. Our oscillator just jumped to overbought on Friday. As we start August this week, we want to position for the minimum long exposure to the market as possible. The market has a great distance to go down in the next six to ten weeks and we want to at least get you out of your long positions. We recommend hiding in cash for the next couple of months. Your 401(k)’s will thank you in September.

Dow Industrials: 11,219.70 +119.27
QQQQ: 37.11
RYVNX: 23.43
RYAIX: 25.00
RYCWX: 42.54
TLT: 85.70
BEGBX: 13.55

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