Sunday, September 24, 2006

Stocks Are Ready To Go Down

Last week Thursday and Friday, we got to see a little of what we thought September would bring to us, a little selling but it was selling.  The week contained a potential relative high especially considering the SP 500 mark of around 1325 holding the advance.  The upcoming week will bring us more information on that score.  This happens to be the last week of September but it is also the last week of the quarter so there may be some position squaring, as they call it, in front of the weekend.  This is usually done by the middle of the week but this has been an unusual quarter so the last week will probably give us something to fret about, too.

Looking at last week, we see that the SP 500 closed just under the 1315 level so about 10 points below that glass ceiling we have talked about.  Our favorite index, the NDX (NASDAQ 100), managed to struggle up to the 1655 level before closing the week at 1622.  

As for the Dow, we see that its closing high for the recent move of 11,613 is within 110 points of its all time closing high back on January 14, 2000 of 11,722.  We are certainly surprised by the possible miss if the Dow can’t make this level.  We wouldn’t feel bad if it didn’t make it but just the idea that it wouldn’t after being so close is almost not right.  In fact, we wouldn’t be surprised if the Dow did make a small new high which would pretty much put the cherry on top of this rally attempt.  

For now, though, we have to figure that last week’s highs in all the indexes are the last highs of this rally.  Now we should find our way to the down direction and stay that way for a while.  This rally has extended much further in terms of time and price than we thought possible but since it has stretched this far it has given many traders/investors a sense of well being.  We expect the stock rally to have a difficult time giving itself up to the bears but we do think it will.

This complacency is measured in terms of the volatility indexes.  The one we have been mentioning here is the VIX which finally got some life back during the pull back of Thursday and Friday.  After trading almost down to 10.50 on Wednesday September 13th, this index has now found its way up to 12.59.  On June 13th, this index traded as high as 23.81.  We think this index has the potential to get to triple digits in this next decline but the first stop would be in the low 20’s.

Monday brings us the August existing home sales so we are on the lookout for that number.  This is a bit of a lagging indicator because these sales are not reported until closing so we will probably see weakness in them.  The reason is that interest rates peaked in July, just when these sales were made.  We’ll see what the market thinks of them and whether they are bearish or not.

Last week, the bond market enjoyed some poor data points, especially the Philly Fed report we mentioned.  The Treasury bonds have been in a nice uptrend since the beginning of July.  This time frame is right around the same time the mortgage rates peaked.  The bonds seemed to break out to the upside (prices not rates, rates are going down).  You can see this if you look at three month chart of the TLT (we have owned this for a while, getting paid pretty well to hold the position due to the dividends).

Dow Industrials:  11,508.10  -25.13
QQQQ:  39.87
RYVNX:   20.48
RYAIX:  23.50
RYCWX:  40.80
TLT:  89.61
BEGBX:  13.82

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