Time for a Pullback

Monday, July 18, 2005 | 01:11 PM

One of the fascinating things about the equity markets is how so many different methodologies very often reach the similar conclusions. After a significant run up from the pre-market London bombing related panic, the markets now appear overbought and in need of some consolidation.

This is based not on any specific market reading, but rather on a variety of different gauges:

• The last few days of the advance has come on decreasing volume, never a good sign for the short term;

• The length of the recent move suggest it is getting tired and due for a rest (See Jeff Saut's “day count”);

Dick Arms notes his Trin (or Arms) Index for both the NYSE and Nasdaq are in the overbought area;

• Cycle Forecaster Charles Nenner observes that cycle work suggests softness until the end of July;

• Kevin Lane of Technimentals notes that markets are near their upper ranges with resistance just overhead;

Bearish sentiment is at an extremely low 14%;

• VIX at a 9 1/2 year low;

Carl Swenlin nearby chart reveals excessive bullishness
(UPDATED: JULY 18, 2005 2:35pm -- Decision point discovered their chart contained a a bad data point; DIsregard this bullet point)

Given these 7 6 7 factors, coming on top of the post-London 7/7 run, the markets are overdue for a pause.

The reasons these different approaches on occasion yield similar perspectives is that they are all based on the same data sources. After all, Market action primarily consists of price, volume and time. With the exception of sentiment surveys, these other approaches rely primarily on these 3 key components.

Given the lack of significant economic news this week - and the tendency of Greenspan’s Congressional testimony to grind trade to a slow drip - the market will be looking towards earnings. So far, the impact has been company specific. That leaves the aforementioned sentiment as well as technicals to be the key drivers this week.

Longer term, corporate balance sheets are clean and cash rich, the consumer is still carrying the entire economic load. Unless and until we see real hiring and CapEx spending by companies, the jury remains out on the expansion continuing very deep into 2006.

Our investing posture is as follows:

Short term, we expect some weakness, as markets work off their overbought condition.

Intermediately
, we believe the rally can continue into the mid-Fourth Quarter, and advise using the short-term weakness to add to long positions.

Longer term
, we are less sanguine about 2006 than our more Bullish peers. We suspect the market might be topping out around November.

Plan accordingly.

Monday, July 18, 2005 | 01:11 PM | Permalink | Comments (2) | TrackBack (0)
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Comments

I think we're on pace for about a 6% rate of return in the diversified index. It probably be on either side of that, hopefully up. But I'm not sure how bad that would be in a low-inflation environment.

I keep looking at those job numbers, and wonder when we'll be seeing overheating with all this cheap money and deficit spending. This expansion is getting long in the tooth. Maybe it's oil prices keeping a lid on it.

Posted by: muckdog | Jul 18, 2005 7:41:59 PM

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