Sunday, September 17, 2006

New Week Ahead

Last Friday saw a lot of volume due to the options expiration and there was a bit more upside. The opening brought about higher prices after the CPI showed inflation was just right. With the market trying one more “Fed is Done” rally, we keep thinking the “Obvious” trade isn’t going to work Every time, is it? The Obvious trade being the one that the market goes up if there is maybe a hint that the Fed won’t raise rates. The market just isn’t that easy.

As it happens the major indexes did have a good pop at the start but failed to hold those levels as the day wore on. They were all up but not as high as they were off the bell. Normally, we like to see a good pop followed by a complete reversal where all of the indexes close down on the day. With options expiring, that just wasn’t to be on Friday so the market leaves us with a little mystery as to the signal it gave. This is customary for the market, in case you were wondering.

We think a lot of price action on Friday was due to the options expiration so we are not going to try to figure out if we had an exhaustion top on Friday morning or not. That information will come soon enough, as we are very near the top of the range for the market in our opinion. If the market wants to go higher, we will be disappointed again because we try to listen to the message that the market is telling us. When it forms a top and falls away from it, we think that it can approach that old high, thus allowing those who didn’t sell to sell. Well, here we are at the May highs in the Dow and the SP 500 so what will happen?

We can just tell you that the market’s technical indicators are weak going into this high. The market can still do what ever it will do but as we see it, the technical basis for any further advance just isn’t there. What that tells us is the market is just trying to fool as many people as possible, again something customary for the market.

As weak as the technicals are, we must follow the instructions the market is giving and that means staying short or selling, as is your case. In fact we think the market is on borrowed time and we are going to shortly see a drop that will bring sharp focus how vulnerable the market really is.

Over the next few weeks there are several data points coming out that we like to follow, some are potential market movers. To us they are more like road marks so that we know where we are going. Some of these data points have to do with housing and probably will show some improvement this month just because interest rates eased a bit in August. Even if that is true, the housing market is still in down mode and we do not think a little interest rate reduction will fix it. And, as housing goes, so follows the stock market…

Dow Industrials: 11,560.77 +33.38
QQQQ: 40.11
RYVNX: 20.20
RYAIX: 23.32
RYCWX: 40.35
TLT: 87.46
BEGBX: 13.62

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