Wednesday, May 09, 2007

Rally May Be Done

Market Action:
CSCO was the headline for the opening on Wednesday as that stock started the market on a poor footing. To balance the negative CSCO news, an analyst upgraded IBM and that gave the bulls some fuel to hold prices fairly level for the Dow, but…

There was one other news item, that from TOL, Toll Brothers home builders. TOL said that it faces difficult conditions in most markets and they had to reduce their most recent forecasts. The Chief Executive Robert Toll said “Twenty months into this housing downturn, we continue to face difficult conditions in most of our markets”. Of course, as you know, Wall Street doesn’t hear news like that because they have already decided the housing problem is behind us.

The NASDAQ indexes started down and of course gradually worked their way back to even before the Fed’s announcement. From there, Wednesday’s action was dominated by the aftermath of the Fed’s non-decision on interest rates.

At first some selling came in but that lasted only about 5 minutes and then there was some nervous trading for about a half hour with the market moving around to find some place to trade. About a half hour after the decision, the market leaped ahead and closed up, not much, but up on the day.

You’re probably sick of hearing this but Wednesday’s action felt pretty weak to us. The volume was not out of the ordinary and we know that most traders were “worried” about the Fed’s decision and couldn’t really trade until after the announcement (are they kidding us?). But, given that we have come so far, so fast, we are more convinced than ever that the market is about to suffer some down days and they will occur very soon if not on Thursday.

One of the items is the way the VIX traded. When the index drops like it did today (it didn’t drop much) it means that options traders are moving away from put options meaning they have less fear of a drop in the market. We note that the VIX closed at 12.88 here at nearly 13,400 in the Dow and back in February, just before the big drop in the Dow, it was trading around 10. Back in those days, long ago, the Dow was down around 12,700 (did we say Down).

Our momentum indicators are telling us that the move has lost some strength. Looking at momentum indicators on any standard charting service (check BigCharts in the links on the left) at least shows a flattening of momentum which should lead to a roll over and down.

We have become so numb to this never ending up beat of the market that we have almost succumbed to these up days as being a way of life forever. It reminds us of the Minnesota winter that seemed to drag on and on, but even that came to an end and we had temps around 80 degrees here today. So to, the market will turn over and go down. We think the time is here and the time is now.

When the market turns, there will be a rush to the exits and prices will drop quickly. One of the biggest problems is that hedge funds have continued to buy up this market just because it is going up. They are mostly long and leveraged. With a downturn that lasts more than one day, they could easily all decide to get out. They don’t worry about what a company’s long term outlook is and they certainly don’t fall in love with their stocks and hold them till they die; they are only concerned about if the price is going up.

This is not the time to be investing in stocks. “Sell in May and Go Away.” This May brings you some of the highest prices ever, especially in large blue chip companies.

Dow Industrials: 13,362.87 +53.80 (record high)
VIX: 12.88
HUI: 342.21
QQQQ: 46.84
QQQRS: 0.32 bid
QQQRT: 0.53 bid
RYVNX: 15.01
RYAIX: 20.32
RYCWX: 31.46
TLT: 88.29
BEGBX: 13.95

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