Monday, July 16, 2007

Technical Top in Place?

Did the Fat Lady sing or was she just eating at IHOP when she heard the news that Applebees was being bought out by IHOP. Maybe she was singing for joy at the prospect.

In any event, the stock market looks like it is sending another big technical signal with the Dow up to a new record high on what is really a down day. The Dow managed to stay positive on the day but both the NASDAQ and the SP500 were down. Then there was market breadth which was negative with advancers being eclipsed by decliners 1048 to 2226 (according to the WSJ). NYSE Volume was light at just over 1.3 billion shares and only 466 million in advancing stocks compared with 883 million in declining stocks.

The Dow was the strongest of the indexes in the early going as well as later in the day. Look specifically at the action right after 1 o'clock EDT. The stock market left a new high with some business on the downside.

With the full weight of the evidence going to either non-confirmations of the Dow’s new record high or in the light volume department, the technical evidence is tilted in the bearish direction this evening.

We have been wrong before so we are being a little cautious this evening but we are mostly convinced that Monday’s action warrants a more bearish stance. The pattern in the move is consistent with a top, probably a major one, but anything can happen and probably will. Tonight, our neutral position must move back to bearish in the stock market. If we are wrong, the market will immediately let us know. If we are right, the market will be showing us more technical and fundamental reasons to be bearish, with the greatest probability that the market will record some down prices.

Just as if we needed some fundamental news to test our position, in a coincidental matter of timing, the second calendar quarter has just ended and we are starting to see corporate earnings’ announcements. There are some big companies reporting and we see these news items as an opportunity for the market to react negatively if our position is correct. We would say that the market has priced in “perfection” and the actual reality is somewhat less than that. We usually say that it doesn’t matter if the news is good or bad, what matters is how stocks react to the news. We would say the time has come to react badly in terms of price. We never did believe in coincidence, did you?

Our intention is to wait until Wednesday evening to post again but if something dramatic happens on Tuesday we will be back tomorrow evening. We think anything is possible here with the stock market. Expecting a drop in the market doesn’t seem to be a past time of the public, especially with the Dow almost at 14,000. Round numbers are special and Friday the 13th is a special day; so far, it is the high for both the NASDAQ and the SP 500. Let’s see if that changes.

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