Monday, April 23, 2007

Dow Finally Takes a Day Off

We’re diving right into opinion this evening because we think the market has just gone out to lunch. The bulk of the technical indicators show waning upside strength meaning the prices should be rolling over. We think the best examples of this last week were the underwhelming volume and the divergence of prices in the major indexes.

Realistically, the market needs to at least take a breather which it sort of did today for its second down day in about three weeks. The Dow level showed record high for a few trading days in a row but the broader market didn’t really follow along. Friday was option expiration day so some extra volume came into the market on a very big up day for the Dow. This straight up move is giving the bulls a large amount of confidence and just killing the bears, that would be us.

Part of our theory has been that the housing market would do in the stock market and ultimately put the US economy into a recession. These outcomes have been “dealt with” by the market so the news has just disappeared, at least the bad news. We have seen the bullish enthusiasm when it comes to any positive news or projection of good news while anytime there
is some bad news the market just takes a breath and goes higher.

Our opinion is still that the housing market will ultimately do in the economy and we think that is already starting to happen but the market has not seen it as of now. The stock market is in a strange place with nothing bothering it and shorts are getting squeezed. It’s very easy for the bulls to just buy but we wonder when the money runs out.

On the other hand, we have not been in tune with this move for the last several weeks and we certainly would not have expected the move to go this long or this far. This has caused us to question ourselves which we think we do every single day anyway. We think the price level of the Dow is so very close to the eventual high in that index. The bullishness is palpable and we think it is unjustifiable, at least here at this level. There can’t be very much upside left in this market. The divergence in the major indexes is a key “tell” in that analysis.

The automatic contrarian position should be Short and that is what we are but we are not happy right now. Being objective though, there is no way to get long this market at this level. We may be wrong about this but there seems to be no good reason to get long with a big up move behind us.

We are reminded about the standard axiom for the market at this time of year, “Sell in May and go away”. This may be the best advice. We recommend early May.

Dow Industrials: 12,919.40 -42.58
VIX: 13.04
HUI: 355.00
QQQQ: 45.47
QQQRS: 0.78 bid
QQQRT: 1.19 bid
RYVNX: 15.86
RYAIX: 20.86
RYCWX: 33.56
TLT: 88.47
BEGBX: 14.01

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