Bottoming Process Continues

Tuesday, November 01, 2005 | 03:03 PM

The market’s tone has becoming increasingly firmer as of late. The many technical, internal and seasonal factors we track suggest that a modest short-term bottom is being formed. While the bottom has not been fully formed, we are becoming increasingly more comfortable shifting towards a Bullish position (however briefly that may be). We would be even more aggressive if several confirming factors showed improvements.

Regardless, we find that the elements are slowly coming together to support at least a modest year end rally, with a short-term bottom made sometime in early-mid November, and a projected top in mid-December.

The key positive factors include:

NASDAQ Short interest hit a record high last week; We have historically seen extremes in shorting (especially by odd-lotters) occurring fairly close to intermediate bottoms.

NYSE Thrust Sessions: occurs when the NYSE’s decline to advance ratio is 2:1 or greater, and simultaneously has a similar ratio of up/down volume. This signal has recently hit levels previously reached in May of this year, June 2004, and of March 2003 - all high fear junctures that were near intermediate term bottoms.

Nasdaq 52 Week High Lows: As the nearby chart shows, the cumulative high low index has reached levels that in the past have been good buying junctures. Do note, however, that this most recent peak is much less severe than prior periods that formed better bottoms.

A neutral signal:

NDX MACD Buy Signal: Moves over 75% often precede positive price gains; As of late, this has been near the 50% level. This has now formed a higher peak, ending what is thought of as bearish implications. While this is not yet bullish, its no longer a negative factor.

A negative signal:

The Advance-Decline Line: Market breadth has been weak. The last 2 days in October marked the first consecutive back-to-back days of positive breadth in weeks. Further, Nasdaq’s cumulative multi-year lows in the A/D line has not been a bullish sign for the techs.

All of the above are internal market indicators. They have little correlation with the Macro-economic data we track, which has become increasingly discouraging.

We disagree with the Fed: Inflation is Robust, Real Wages are down -2.3% for the quarter. Total comp costs (also inflation adjusted) are down 1.5%.

Meanwhile, actual Growth -- and not the estimated prelim BLS data -- is only modest at best.

Thus, our expectations for a rally are modest: a 10% move for the Nasdaq 100; the SPX runs into difficulties in the 1280-90 area. Dow Industrials could see 11,400.

Beyond New Year’s Eve we become increasingly Bearish.

Tuesday, November 01, 2005 | 03:03 PM | Permalink | Comments (8) | TrackBack (0)
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how can we rally without the semi's?

Posted by: bill | Nov 1, 2005 3:40:12 PM

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