Thursday’s stock market tried to continue the rally that has been in place for about three days but couldn’t quite keep that type of momentum going. Yes, the major indexes were up today and, yes, we lost some more money today, but we do not believe this is the start of a major bull run as so many on Wall Street are trying to make you believe.
There are many things to look at technically that should bring clarity to this subject. The very first one of those is the incredibly low volume on which this rally was built. Bull markets need volume in order to survive. If we were to see a bull market starting now, there would be massive volume and massive price movement, not this weak volume and not these little 1% to 2% moves. The bull market never lets you in, you always have to chase it. While you may feel like you should chase this, just imagine if the move would have been 3%-4% a day for a few days on big volume. You would have to chase it.
The last big thing to discount this “bull” is something we have mentioned in the past, the volatility index, VIX. (The VIX generally moves opposite the move in the market so on an up day, the VIX should be down.) We would really like to see some bearishness out there in order to call this a bull move. Instead we see the VIX sinking to its May numbers even though the price levels are still well below the May highs. Looking at the SP500, we see a high price of 1325 on May 5th and today’s close was 1297. In the NASDAQ Comp, we see a price high of 2370 on April 19th and today’s close at 2157. This value of the VIX indicates a docile complacency that bullishness is based on.
When we wrote about the Volatility Index in a post early this month (Wednesday, August 2, 2006—check the archives at the left for the full report), we said that we would know when to get bullish by watching for this VIX number to go up to around 50 or 100. Today’s VIX closed near 12 which is near the early May levels. This is not a bullish number and we remain very, extremely, mightily, pick your adjective, bearish.
We said we had a little powder that was dry and we still have it. I guess this 1550 NDX number was eating at us over the past few weeks. Now that that number has been attained, we are now willing to deploy some or all of that dry powder.
We expect the 2004 NDX lows to be at least challenged in this next move down and those are right around 1400 so about 10% from here. Our best guess is for something far greater than that, giving you a first hand look at the way the bear can destroy value in a hurry. As that develops we will be here to analyze the patterns and possibilities.
Thursday’s LEI, Leading Economic Indicators, were down 0.1% rather than the estimated up 0.1% which the stock market took as further confirmation that the Fed is indeed done. This rally tried to get going but the bulls were exhausted so not much happened on the upside on Thursday. At the moment, the battle cry is “The Fed is Done, Let’s Buy” and we would say Caveat Emptor, buyer beware.
Have a great weekend.
Dow Industrials: 11,334.96 +7.84
QQQQ: 38.73
RYVNX: 21.58
RYAIX: 24.04
RYCWX: 41.71
TLT: 86.52
BEGBX: 13.64
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