Wednesday, February 07, 2007

Calling the Stock Market Top

Market Action:
CSCO led the charge at the opening bell with a jump of about 5% after Tuesday’s late day earnings announcement.  As we mentioned last night, the CSCO good news was going to be spread over “the entire world” and we would see some upside excitement.

Actually the response was not exactly as we expected due to the immediate pullback in the indexes right after the open.  The Dow actually went negative during this period.  We were scratching our heads wondering why the pop wasn’t a little stronger and then…

The market jumped after the early indecision such that the Dow was right at the 12,700 line, a new trading high.  The NDX only managed to get up to 1816.77, but still very close to our target of 1820 to 1825.  The market traded in place for about three hours before we saw a break which took the Dow negative again and the NDX lost half of its morning gains.  

With about an hour to go in the session, the market managed to rally giving the Dow a green close but not by much, 0.56 as you can see below.  The NDX recovered most of its early gains and closed up 1% at 1810.95.  

We are concentrating on the Dow and the NDX, NASDAQ 100, in this post due to our keen interest in these two indexes.  Both of them rallied just like we mentioned in our last post.  The Dow made a new trading high but couldn’t close above last week’s all time high and the NDX moved up near our range but a fair distance from its January high at 1847.  

In December we forecast that we would see a high in the first couple weeks of January and we wanted to allocate more funds to the short side at that time.  Well, the NDX did top in the period right in the middle of the month but the Dow and the SP 500 have continued their move higher even on Wednesday.  

We think the best time to go short is right now, with the NDX climbing and not achieving a new high so we added to our Rydex position on Wednesday afternoon.  We wanted to free up some of our funds that are tied up in the bond market so we could add to our short position over the next few days if conditions warrant so we sold out of our TLT position.

In our opinion, the market has a great probability of having topped today or in the last few weeks.  There are many technical conditions that bring us to that conclusion and we are now putting most of our funds on the short side of the stock market.  We will not go into all of the details this evening but we thought we would emphasize our point by telling you how we traded today.

We strongly urge you to move into cash in most of your positions.  Some of you have thoughts that you can beat the market with the stocks you have and maybe you are right. Tonight you should take a good hard look at your positions to determine if you still think that way.  Right now we are looking at what we think is a major top in stocks and an ideal time to sell—we said this last night but not in such uncertain terms.  Yes, there will be other opportunities to sell or go short but these are some of the best prices in the indexes you will probably see for a long time.  

Calling tops is not a science but we try to make it that way.  The market may still want to crawl higher but if it does want to go down, there will be very little question about that.  We are thinking that could start as early as Thursday.

Dow Industrials:  12,666.87  +0.56
VIX: 10.32
HUI:  332.45
QQQQ:  44.46
RYVNX:   16.34 (added more to portfolio today)
RYAIX:  21.04
RYCWX:  34.52
TLT:  88.06 (sold out today at 88.05)
BEGBX:  13.60

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