Wednesday, February 14, 2007

Bernanke Rules

Market Action:
As the market opened for trading on Wednesday, the bulls were on a tear especially after the “good” news from AMAT on Tuesday after the close.  You may recall that when a company, and AMAT is a fairly large one, announces what is perceived to be good news, that news is deemed to be good news for the entire market and that was mostly the case in the early going on Wednesday.

A half hour into the session, Bernanke started his semi-annual address to Congress, starting this day in the Senate and going to the House on Thursday.  What he says in front of the House will be essentially what he said to the Senate so the “news” is out.  His comments were interpreted as interest rate friendly based on his comments about consumer spending remaining in tact through the housing slowdown and that now housing is stabilizing, Bullish words from the head of the central bank.  So, the bulls partied hard for about half an hour right after his comments.  

From there, the Dow traded in a fairly narrow range the rest of the day and ended up 87 points to another new high.  Well, we have to tell you that we are getting very tired of this market bouncing out of what looks like a good down trend.  The SP 500 also made a relative new high but the NASDAQ still has a short distance to go to best its January high.  

Obviously, our top call last week was a bit premature for the Dow.  Looking at the technical backdrop for Wednesday’s new high we think the numbers are a little weak again.  One of our favorite indicators is the 5 day upside volume (NYSE) and that indicator is sitting at 780 million shares after Wednesday’s trading.  This is well short of the mark set at most relative highs which is right around 1 billion shares.  Even the total volume for the day was light at right around 1.5 billion shares.  So, volume is an indicator that really isn’t showing us the strength we would expect.

New 52 week highs on the NYSE were strong on Wednesday at 403 but at a new high you would expect them to be a little stronger than that.  Looking back to the early December highs, we saw 585 new highs (December 5th), well above today’s number.

Our momentum indicator has also lagged this advance but this is sometimes a lagging indicator with it being able to confirm a top rather than predict a top.  At any rate, these three indicators of ours are not showing powerful numbers at all.  Yes, price is moving up but under the weak technicals, this move is not being confirmed by underlying strength.

The pattern that the market is in shows some trendline support (upward trending pattern) but on lower volume (downward trending pattern).  Prices are stronger than volume and that is not a good sign.  Once we see the trendline support break, there will be more confirmation that a high is behind us.  We so try to beat that break because so much of a move can happen on the day of the break.  

There is no doubt that this move is a major finishing move based on the weak technical support.  The only question is “When will it end?” and we think the answer is soon.  We are fully short with our funds so we are putting our money on that statement.  We wish we would have waited one more day to deploy that last of our funds.  (We are keeping some powder dry to trade the VIX options or other options but that is a very small portion of our assets—too much risk.)  Prices were much cheaper today.

Dow Industrials:  12,741.86  +87.01 (new all time record high)
VIX: 10.23  (dipped below 10 early in the day)
VIXEC.X: 1.30 x  1.40
HUI:  346.27
QQQQ:  44.60
RYVNX:   16.28
RYAIX:  21.01
RYCWX:  34.16 (new low)
TLT:  88.07
BEGBX:  13.64

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