The Big Picture

BEAR MARKET RALLY

Tuesday, April 01, 2008 | 04:52 PM

in Economy | Markets | Psychology/Sentiment | RR&A

NOTE: This Market Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on Tues 4/1/2008 after the market close

This is posted here not as investing advice, but rather as an example of a trading call for potential subscribers.

>>>

Markets staged a mighty rally today -- the type of rally that is typical in Bear markets. In normal, healthy markets, 400 point days are simply not necessary. They tend to take place in an environment of negative sentiment, risk aversion, and short selling.

Today’s Q2 starter was a similar affair.

However, overall volume was heavy and the up down volume was nearly 10 to one. This suggests that today's move will have some legs, and we looked at this present surge as a typical oversold rally that should run anywhere from two to eight weeks.

While this move began from a condition of deep negativity. This has quickly been replaced by an excess of speculative optimism. The classic example was the recent Barron’s headline, “Dow 20,000 by year's end.”

Thus, we do not want to maintain short positions for the next few weeks, as we believe this rally is a classic bear market bounce, and it presents a selling opportunity later this month.

March represented the fifth consecutive negative month for indices. This is only the 10th time that such a streak has occurred since 1928. Of the prior nine times where five consecutive negative months occurred, only four saw markets higher six months later. The average total return during those previous periods was -2.64% after three months. What this suggests to us is that a five-month streak indicates the early portion of a lengthier bear market.

Buyers into today's rally who are looking for more than a trade must believe that prices of stocks reflect the full impact of recession. However, this is not truly reflected in the earnings consensus for the S&P 500. We note that current third and fourth quarter earnings consensus are at +20% (Q3) and +50% (Q4). This hardly reflects anything beyond this a mild brief first-half recession.

Our expectations for the ongoing economic climate will include a much deeper and more prolonged recession than is currently reflected by equity prices.

Intermediate term, the market is also facing several Buzz saws over the next few weeks, which have the potential to take some of the wind out of its sails: We start with Friday's non-farm payroll (NFP). While we frequently advise investors not to put too much attention on any one datapoint – its best to focus on the overall trends -- this Friday's NFP certainly has the potential to be a major market mover.

After NFP, markets will confront what is likely to be a rather mediocre earnings parade. The season will begin in full force next week. At this point, expectations for the financial sector are grim. Yet despite this negative outlook, it seems that many firms in the financial sector are finding new and clever ways to disappoint: To wit, UBS, Deutsche Bank, and Merrill Lynch. (Kudos to Lehman Brothers for their surprise capital raise. Its worth noting, however, that healthy companies do not need to scrape together surprise $3 billion capital raises).

Outside of the financial sector, we have seen significant weakness in earnings in the technology, retail, and non-exporting sectors.

On top of what is likely to be a mediocre earnings season, the next hurdle for stocks to overcome will be lowered guidance. In general, CEOs and CFOs have been unusually circumspect regarding both the economy and their firm's prospects. That weaker guidance will very likely lead to a lowering of earnings prospects for the second half.

And stocks still are not cheap. A trailing one-year P/E ratio of 18 is reasonable, but hardly what we would expect to see at the beginning of a new bull market.

Lastly, is the surprise factor. There are simply too many unknowns, too much bad paper stuffed into too many dark corners, for us to embrace the markets for anything other than a trade at this time.

Nothing in the overall economy has changed: we are continuing to see an ongoing economic slowdown, characterized by a weak consumer spending, ongoing difficulties in the credit market, a still more abundant housing market, inflationary pressures found everywhere – except in wages and income.

-Barry Ritholtz
April 1, 2008

Batten Down the Hatches!

Friday, February 29, 2008 | 03:48 PM

in Markets | Psychology/Sentiment | RR&A | Trading

NOTE: This Market Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on Tues 2/29/2008 before the market closed.

This is posted here not as investing advice, but rather as an example of a trading call for potential subscribers.

>>>

Several weeks ago, we discussed the likelihood of a tradable low being put in place. On January 23, 2008, we thought conditions were in place that would allow agile traders to play for a bounce -- but advised that long-term investors avoid the sloppy tape. At that time, we suggested an 8, 10, or 12% bounce trade was in the offing.

That has come to pass. We now find ourselves in a situation where the markets have rallied significantly on lighter volume, and have since rolled over. This is a significant sell signal.

Consider: Over the past month we have seen one-day rallies of nearly 200 Dow Jones points on four separate occasions. A review of the headlines shows all too infrequent arguments against the possibility of a recession, or if there is a recession it being mild and fairly discounted by the equity markets. The economic news continues to worsen, while the Bulls maintain a steadfast state of denial. Articles abound, explaining why there won’t be a recession, or if there is a recession, it will be mild and is already priced into equities. My favorite piece last week was “How to play the coming recovery.” These are signs that people are still speculatively inclined, are buying the dips. The bigger fear is not any on stocks, but missing the rally. That is not what you see at market bottoms.

These optimistic views are increasingly being proven false. We are now in a Bear market and are in all likelihood in the beginning quarters of a recession – one that is potentially deep and long lasting. Housing inventories are at record highs, the US dollar is at record lows, Oil is over $100 a barrel, and Gold has set all-time highs.

These are not the sort of conditions that lend themselves to economic growth or stock gains.

As of leap day, February 29, 2008, you have several choices ahead of you: a) you can try and catch the falling knife and, an activity that in the past has proven to be dangerous and painful; b) You can sit tight, watching your portfolio decrease in value, confident in the belief that stocks will eventually return to their previous valuations (What is unknown now is whether that will take months or years to occur; c) Or, you can aggressively become even more defensive than we have advocated in the past few quarters. Preserve precious capital, wait out the storm.

We choose “C.”

We will go into greater details on the economy in a future missive, but for now, from an investor's standpoint, understand what your role is today and preserve capital, and be cognizant of risks. Now is the time to Batten down the hatches to preserve capital and to wait patiently for the greater opportunities that will exist to play equity's on the long side. Rallies are opportunities to exit equities. We are constantly looking for better opportunities to put your hard earned capital to work, and today, the in a long side of US equities is not it.

-Barry Ritholtz
February 29, 2008

Time for the Bounce

Wednesday, January 23, 2008 | 03:14 PM

in Markets | RR&A | Trading

NOTE: This Market Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on 1/23/2008 before the market closed.

This is posted here not as investing advice, but rather as an example of a trading call for potential subscribers.

>>>

Last week, we noted the % of NYSE stocks trading below their 200 day moving average was about 23%. That suggested we were close, but not at a tradable low.

Today, our trusty Bloomberg terminal is showing just 13% of NYSE stocks trading above their 200-day moving averages.

That is lower than anytime in the 2000-02 bear market. And lower than anytime in the 1998 and 1994 bear markets.

This indicator is saying that sentiment has become excessively negative -- considering we are only 3 months off of the all time S&P500 highs.

This suggests we should begin the counter-trend rally shortly. We would expect this to last anyway from 2 weeks to 2 months, run 5-15%.

We also would use this upcoming lift as an opportunity to sell equities.

This is a bounce, not a major shift in trend . . .

-Barry Ritholtz
January 23, 2008

Buying Panic?

Thursday, May 03, 2007 | 06:56 AM

in Economy | Markets | Psychology/Sentiment | RR&A | Trading

Several people have specifically asked for my explicit investing thesis, as opposed to the more general economic discussion/market analysis we see on the blog.

It is a fine line to provide stimulating discussion here, while at the same time not being unfair to the people who actually pay for our research and commentary. Anytime research runs in the press (Such as this "Real Estate and the Post-Crash Economy") some subscriber lodges a complaint.

An astute observer should be able to deduce what my general views are from the various posts and appearances. I do not think any of the paying subscribers will be offended if I pull an introductory quote that reveals some additional details from a much longer piece.

This is the intro from yesterday's market commentary:

"In a seeming paradox, we have a rapidly accelerating market, and a rapidly decelerating economy. Hopes for a rate cut in the face of this asset inflation are pushed out further and further into the future. This is now a trading market, where momentum and trend dominate, increasingly detached from the decaying domestic fundamentals. Global growth remains strong, and despite that – or perhaps because of it – US markets are lagging their overseas peers (see table of global bourses on page 5).

How much further this market can rally is anyone’s guess, but a “Melt-Up” to Dow 14,000 would not surprise us. While overdue for a pullback (see #1 below), the markets have shown little interest in any such activity. Instead, traders seem to want to rally ‘em on any news, good or bad.

A melt up would likely be accompanied by rush back into equities by the one group notably absent from the current action: the public. As the trading volumes at the major online brokers have revealed, John Q. Public is nowhere to be found in the current market. We suspect that the aforementioned rush back in would be accompanied by a significant spike in Bullish sentiment. Until that excessive Bullish sentiment develops, it is not safe to trade on the short side of the market.

Meanwhile, a “melt up” presents a high risk trading, not investing, opportunity. A melt up inflates the air pocket that has already developed underneath the present environment; only the most nimble traders are capable of avoiding the ensuing danger."

Today's WSJ had an interesting quote describing Wednesday's action as a Buying Panic, a characterization I do not disagree with:

"For the next week or two, I would advise investors who have money that they're thinking of putting in the market to hold off," said strategist Al Goldman, of A.G. Edwards & Sons. Mr. Goldman said there seems to be a "buying panic" this week among money managers who have come to regret keeping clients' money on the sidelines during last month's gains. "At the end of the day, these guys are paid to manage stock, not to manage cash," he said."

That oughta hold the little bastards . . .

Sources:
Next stop, Dow 14,000?
RR&A, May 2, 2007
http://www.ritholtz.com/component/option,com_docman/task,cat_view/gid,26/Itemid,126/

'Buying Panic' Drives Stocks As Blue-Chip Rally Goes On
PETER A. MCKAY
WSJ, May 3, 2007; Page C1
http://online.wsj.com/article/SB117814978098390167.html

GDP Revisited

Monday, February 12, 2007 | 05:30 PM

in Data Analysis | Economy | Psychology/Sentiment | RR&A

NOTE: This Market Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on Mon 2/12/2007 5:35 pm;

This is posted here not as investing advice, but rather as an example of a trading call for potential subscribers. We expect to post future advisories in a similar manner -- after the call, but in the correct chronological location on the blog.

>>>

When the Q4 2006 GDP data was initially released at 3.5%, we noted that it did not comport with the data we were seeing elsewhere. And in January, we approvingly referenced Caroline Baum's analysis (Q4 Data Doesn't Add Up).

Then last week, the Commerce Department released their data on Inventory levels. Based on that, it turns out that our prior criticisms of GDP were dead on:

"U.S. wholesalers' inventories took the biggest tumble in more than three years during December as overall demand for their goods raced forward.

Wholesale inventories decreased by 0.5% to a seasonally adjusted $393.76 billion, the Commerce Department said Thursday. November inventories rose by 1.1%, adjusted from a previously reported 1.3% climb.

The 0.5% decrease in December wholesale inventories surprised Wall Street, which expected a 0.5% gain. It was the sharpest drop since 0.6% in May 2003."

Inventories being drawn down are different than actual production of goods. Hence, this is why the Commerce data overstated Q4 GDP by as much as 75 basis points (my estimate) to 100 basis points (JPMorgan's est.).

Have a look at these two charts. The first is the official Commerce Department data, based only on the prelim GDP. The second chart reflects our new estimates based on the latest inventory data:

Original Release:

The original release (above) gives the impression of an economy moving sideways, growing at a consistent rate between 3 and 3.5%. This is consistent with the soft landing thesis many of the strong Bulls believe in.

Reality check. With the new Inventory data from Commerce, however, that rosy scenario fades away. First, most of the big GDP pop came when rates were at generational lows and were that way for a year. This artificial stimulation is what gave the economy its pop:

GDP (expected revision)

Using the most recent J.P. Morgan estimates (chart 2), we see that GDP has actually been on the downslide since peaking in late 2003/early 2004.

If the economic deceleration continues on (as I suspect it will), there is a very real possibility we will see GDP slip to 1-2% by mid 2007.

-Barry Ritholtz
February 12, 2007

Note: I have also included today's software sector update ; Later this week, I will update our prior stock selection Mosiac Company (MOS)

Sources:
MONTHLY WHOLESALE TRADE: SALES AND INVENTORIES
U.S. Census Bureau News, DECEMBER 2006
http://www.census.gov/mwts/www/currentwhl.html

Looking at Technology: Caution is Warranted

Thursday, February 08, 2007 | 06:12 PM

in RR&A

NOTE: This Market Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on Thu 2/8/2007 6:12PM; This is posted here not as investing advice, but rather as an example of a trading call for potential subscribers. We expect to post future advisories in a similar manner -- after the call, but in the correct chronological location on the blog.

>>>

We continue to watch the Nasdaq 100 very closely. While we have found pockets of strength, there are also signs of non participation and actual weakness in the Index. Given the traditional leadership of Technology, this remains worrisome.

We looked at why this Technology rally has been different from prior moves. We have attached our conclusions.

We also that we have been finalizing our research into the sub-prime mortgage markets, and should have that ready by early next week. As we do this, Mortgage Underwriters and Home Builders have been running into trouble. This research is unusually interesting, and we expect you to find the results quite intriguing.

>>>

Some of the best known and largest tech stocks have done exceedingly well since the July 2006 market bottoms: Cisco, Oracle, Microsoft, Google, Apple, Akamai, Sun Micro, EMC, have all put together an impressive streak.

There can be little doubt that the environment for lots of tech firms have improved notably since 2002. Balance sheets are much better, new web apps (User generated content, Web 2.0) have made up for the decreased demand from the enterprise side. Indeed, much of the excitement in Techland these days is from the newest tech properties: The YouTubes, MySpaces, and Googles have been where the action is. Cisco has been enjoying the growth of the Video over the internet business (See above names), which according to CEO John Chambers, has been booming. (Apple is a unique creature courtesy of a breakout product).

But not all tech firms are enjoying a resurgence. Not participating have been those companies with “issues;” Intel and AMD are stuck in competitive price wars; other firms have had management problems (Dell, Yahoo!) or are having problems with recent acquisitions (eBay); still others can’t seem to get out of their own way (JDSU). Indeed, many tech companies for one reason or another have been mostly exempt from the Tech Rally: SAP, Symantec, Sirius/XMSR, Citrix, Flextronics, Qualcomm, etc.

Then there’s Microsoft.

Since July, its stock is up 50%. We’ve consistently heard three themes given for the move up from MisterSoftee Bulls:

- The introduction of Vista

- The roll out of the new MS Office

- Zune (The iPod killer)

It is hard to describe these product introductions as anything but disappointing. Despite a $500 million dollar advertising budget, Vista arrived with a thud. Only 15% of existing PCs are equipped to handle an upgrade to Vista; Fortunately for the PC makers, Vista’s introduction has led to a surge in PC sales. Indeed, Consumers will primarily get Vista via new PC purchases, and not through (profitable) upgrades. Its looking more and more like the current upgrade cycle won’t be remotely close to that of Windows 95 or XP – missing most of that extra revenue and profit.

And, as far as Enterprise users are concerned, most of the major tech consultants (Gartner, Yankee Group, McKinsey) are advising IT departments wait at least a year before migrating over. The new version of Office has been favorably reviewed, but the huge learning curve may dissuade a rapid migration. As to that mighty iPod slayer, the Zune – it was pretty much DOA. Its program head was unceremoniously shown the door (“he wants to spend more time with his family”). The Apple iPod freight train felt the impact of the Zune like it was a bunny sleeping on train tracks.

Given all this, Microsoft’s shares have begun to soften. We suspect this is due to reality starting to get recognized by the investing community that is partial towards tech.

With Microsoft softening, the charts are showing signs of technical deterioration. They have made a lower low; and the uptrend in place since July has been broken. This is not a particularly healthy technical signal.

~~~

We continue to wonder why technology has been so inconsistent, eschewing its traditional leadership role in a bull market. Leaving aside Semiconductors – which have not participated in a meaningful way in the rally, or in nearly any recent time frames – technology and telecom has seen an uneven, even lumpy distribution of gains.

Given this mixed performance, we wonder: Has the sudden improvement in Technology Indices since July 2006 been fundamentally driven, or might something else entirely been driving share prices?

Let’s look at some charts for a clue. Prior to this recent leg up, Tech and Telecom have significantly underperformed other sectors:

Since the 2000 peak, or the pre-war lows, Tech & Telecom have enormously under-performed:

Buyers of Tech prior to the start of the War have similarly not been rewarded:

After under-performing since previous major milestones, the Techs have managed to put together a very nice run. But it is only since the July 2006 lows that Tech and Telecom have put together a decent string of out-performance.

As the chart below shows, the ratio of Technology stock to Energy Stocks has finally turned positive. For the first time in years, Tech & Telecom is outperforming Energy.

Why is that significant? Primarily, energy prices having reversed since this past summer. And that’s when Tech/Telecom began outperforming. As the charts above reveal, other time frames have been far less kind to technology.

Ratio of Tech to Energy:

This ratio bottomed precisely in July 2006. Not coincidentally, July 2006 was when Goldman Sachs cut the energy exposure of the GSCI commodity index in half. This subsequently led to a 30% decrease in Oil prices.

Our read is that much of the gains in Tech have come via sector rotation. As fast momentum money pulled out of Energy and Materials, they rotated into these big cap liquid tech names: The Ciscos, Oracles, Microsoft’s, Sun Micros, etc.

As the next chart makes clear, Tech seems to trade inversely to oil lately:

NASDAQ 100 versus US Oil

USO = US Oil, based on Texas Spot Oil prices

Our suspicions are that the sudden affection for Tech may not be long lived if Energy prices tick back up. As the red line above shows, they are threatening to do just that.

This leads to our conclusion: Investors need to be extremely selective in Technology. There are pockets of large cap strength in Techland, especially big cap Tech – and they may be masking weakness elsewhere in the overall sector.

The NASDAQ 100 now trades at a forward P/E of 33. That means the average Tech stock is somewhat pricey.

Growth rates vary dramatically from company to company, and so to do improvements in revenue. Earnings gains are not uniformly distributed, many tech names have run up in anticipation of sector wide growth – growth that is not very likely to be broad based. Some of the capital appreciation (rising share prices) has come in anticipation of events that may have already taken place, or as with Microsoft, may not come anytime soon, if at all.

Because of this, we urge Investors in the Tech and Telecom sector to be cautious . . .

Bullish Sentiment Survey

Monday, January 22, 2007 | 11:02 AM

in RR&A

NOTE: This Market Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on Mon 1/22/2007 11:05 AM;

>>>

American Association of Individual Investors (AAII) - Bullish Sentiment Survey

Sentiment may be the key factor in terms of making the determination when this market may be tired and ready to significantly correct. Anecdotally, we have spoken to numerous individual and institutional clients recently about how long bull markets tend to build high levels of over-confidence; Those high levels of over-confidence are frequently accompanied by over-investment.

What sentiment surveys highlight is the level of investor commitment to the markets. Why? Surveys have shown that people become Bullish after they put their money to work. When sentiment is bullish or excessively bullish it suggests investors are at or near full investment. When that happens, there is little fuel left to power the markets substantially higher.

This report includes two of the indicators in our master sentiment model: 1) The American Association of Individual Investors (AAII) Bullish Sentiment Survey (above); and 2) the American Association of Individual Investors (AAII) Asset Allocation Survey (below). Each shows that investor confidence and asset allocations towards equities are at bullish (optimistic) levels. Although these levels are not at extremes yet, they need to be watched, as bullish and overly bullish levels suggest investor buying power is diminishing.

Since they act in a contrarian manner these bullish levels are typically symptomatic with future corrective activity.

A note of caution: Sentiment is never known for being a very timely indicator so it obviously needs to be confirmed by other metrics such as; price weakness, aggressive downside price and volume action as well as breaches of key support levels. We continue to watch $42.00 on the Q's, which we recently highlighted on Nasdaq Comp Review (January 17 2007) as an area of key support.)

~~~~

5 Week Moving Average American Association of Individual Investors (AAII)
Asset Allocation Survey

Note that the Asset Allocation Survey, while not terribly over-allocated to US Equities, is nears the high end of its range. Compare those levels with what equity allocations looked like at highs in 1998 and 2000, and again at lows in after 1987, 1990, and 2003.

We use a moving average to eliminate the short term noise and volatility associated with surveys of this sort. While the actual measure of asset allocation has pushed into the over-allocated zone, it would need to stay high for a few weeks to bring up the moving average into the danger zone.

We will be watching this crucial sentiment indicator closely over the coming weeks. . .

Intra-Day Reversal

Wednesday, January 03, 2007 | 03:32 PM

It’s rarely any one single element that leads to major reversal such as we saw today. However, we can identify a half dozen elements today are significant and contributed the mid-day sell off:

1) The intraday reversal was set up by the opening exuberance and emotional New Year buying – not fundamentals.

2) The drop in Copper and Oil is reflecting a slow down in the United States economy; The CRB Index broke support at 300

3) ADP data – which in the past has been none too reliable -- surprised to the downside significantly;

4) Both Ford and GM saw sales declines of 13% in December;

5) ISM remains near the flatline, as Manufacturing is still struggling with inventory and decreased demand; (who is all excited about 51% and change?)

6) FOMC minutes reveal inflation remains the primary risk to the economy, even as it shows signs of being a "touch softer" than the Fed previously believed.

Note that the selloff in equities began an hour prior to the FOMC minutes . . .

It's still early, and after dropping 150 points, equities are clawing back. Regardless, today is quite interesting.

~~~

UPDATE January 4, 2006 5:55am

Trader Mike has a good couple of charts and several worthwhile links to those who are interested in the Technical underpinnings of the reversal . . .

Defensive Big Cap Rotation

Monday, December 18, 2006 | 04:05 PM

in RR&A

NOTE: This Market Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on Mon 12/18/2006 4:24 PM;

>>>

With the Russell 2000 down almost 1.5% today, and the Nasdaq reversing its earlier gains (its down over 1% as I type this), we wanted to revisit our previous Bloomberg radio comments that after 5 long years, the Big Caps were ready to start outperforming.

That seems to be happening with several names now; We uploaded an analysis on General Electric (GE: Technical Buy), but other large names -- notably Citibank (C) -- have also been trading higher , and on big volume.

This is happening just as the small cap and speculative high flyers are faltering. The rotation away from speculative names -- Nasdaq underperformed last week, while the small cap Russell 2000 is today's biggest loser -- is very possibly a defensive rotation. The big Multi-Nationals also benefit from the weak dollar – it makes their products cheaper to overseas buyers.

We have previously discussed that the Transports have begun rolling over, and the market breadth remains weak. These are a few more pieces in the market topping puzzle. The VIX made multi yuear lows last week, signalling plenty of complacency . However, beware: there is still plenty of liquidity-driven momentum -- all the mergers and private takeouts are proof of that. With the major trend not broken, it remains premature to aggressively short stocks.

We also want to point out that, after nearly 4 years, most of Wall Street has now turned rabidly Bullish. My Street.com colleague James Altucher called for Dow 16,000 next year; Don Hays last week announced his 27% forecast for the SPX in 2007; Cody Willlard 's "Get Real" column essentially says ignore everything else, the only thing that matters is the rally. These ar enot the sorts of things you hear at the beginnings of bull markets . . .

Meanwhile, some Wall Street's biggest bears are throwing in the towel. A Bloomberg article today noted that: Stock Strategists Raise Alarms With Call for Rally.

"The last time Wall Street unanimously predicted an advance for the S&P 500, in 2001, preceded a 33 percent slump over the next two years . . .

The lack of dissent among strategists has caught the attention of some investors. Since the current bull market began in October 2002, at least two strategists every year have estimated declines for the S&P 500 in their annual forecasts."

Rampant Bullishness of this sort is not heard at bottoms; Rather, they are symptoms of a late stage bull market. Indeed, the time to get aggressively bullish is not 4 years into a Bull market, but rather 4 years ago.

~~~

For those who want or need to be invested at all time, GE presents a solid defensive name and a good risk reward ratio.

-Barry Ritholtz
December 18, 2006

Technical Weakness Accumulates

Thursday, December 07, 2006 | 04:39 PM

in RR&A

NOTE: This Market Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on Mon 12/7/2006 4:34 PM;

>>>

Even as the Market shows resilience, the signs of technical weakness continue to accumulate. Toward that end, we have uploaded our comprehensive Technical review of the NASDAQ Composite Index (download it here).

At present, conditional elements remain mixed: Price trend is bullish, while momentum, breadth and sentiment are now neutral.

We need to see a trend break -- confirmed by momentum and breadth -- before we would decide to switch to an aggressively short posture. Although our individual recommendations have been long biased, they are quantitatively driven, hopefully staying in sync with the markets’ shorter term trend. However, enough indicators have migrated away from bullish readings to neutral to warrant increasing shorter term caution.

In driving terms, we are at a yellow light currently, down from a green – and waiting for the red to signal (unless we see a reversion back to green).

Anecdotally, this rally has as much to do with fund managers caught behind their benchmarks, and they are now playing catch up as it does with the strong seasonal factors. Additionally, we see evidence that, after many years on the sidelines, small investors are plowing back in, mostly due to the headline DOW numbers making new milestones. Directionally, the uptrend has not yet been broken.

Though the indicator evidence remains mostly neutral, we cannot help but note the low quality, low priced stocks bubbling up. As is often the case, these runs will likely end on excessive speculation.

Next up on the watch list: sentiment numbers, and volume leaders (to see the types of issues being sponsored). However, opinions and emotion often lead to troublesome decision making, so we defer to the unbiased, un-emotional indicators. They are now mostly indecisive, but we see a gradual shifting downward from previously more bullish levels.

This is another piece of evidence that is building the case for caution.

-Barry Ritholtz
December 7, 2007

Next Technical Confirmation: Stocks breaking Monday’s lows

Friday, December 01, 2006 | 02:36 PM

in RR&A

NOTE: This Market Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on FRI 12/1/2006 2:33 PM;

>>>

Earlier this week, we noted that the Transports were telling us the time to look to short was growing closer.

Today, we got the 2nd piece of that puzzle: The Nasdaq, the Transports, and Dow Industrials have all broken below Mondays low points. (The S&P500 and the Russell 2000 have not).

This is first set of lower lows on major indices – on strong volume – is a 2nd significant signal.

As of now, this is enough confirmation for us to suggest a TRADING SHORT. We would not go hog wild here; There are not enough indicators to get aggressively short – but you can begin to take small short positions in specific names:

Indeed, on the possibility that something untoward could happen on Monday morning, we want to establish small trading shorts – position holders – right here.

Given how far and fast the Nasdaq 100 has risen, that’s likely the best index tyo use as a short. We are establishing a modest trading position – short the Nasdaq 100 (QQQQs) between 43.25-43.75, with 44.35 as a stop loss.

A more speculative short is the Dow Jones Real Estate Index (IYR). It is a collection of REITS that has run up nearly 10 points since early November and may be forming a double top. This is a more aggressive short suitable only for fast traders. Leg into shorts between 85-86; Use 86.35 as a tight stop.

Over the weekend, we will be running sector and individual company analyses looking for specific names and chart confirmations.

Depending upon what we find, we may swap the index shorts for specific names . . .

-Barry Ritholtz
December 1, 2006

Transports Warning

Wednesday, November 29, 2006 | 04:23 PM

in RR&A

NOTE: This Market Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on Mon 11/29/2006 4:23 PM;

This is posted here not as investing advice, but rather as an example of an analytical call for potential subscribers. We expect to post future advisories in a similar manner -- after the call, but in the correct chronological location here in the blog.

>>>

Earlier this morning, we looked at the ATA tonnage index for October. Truck Tonnage dropped 1.8% in October. The index decreased 4.0% compared with a year earlier, making this the largest year-over-year decrease since February 2001. Year-to-date, the truck tonnage index was down 2.1 percent, compared with the same period in 2005.

David Rosenberg, Merrill Lynch's chief North American economist, called it "borderline recessionary."

What might this mean for the markets? To answer that question, we took a closer look at the DOW JONES Transportation Index (TRAN). From a Technical perspective, it is now nearing a very critical juncture -- and is likely to make a big directional move soon. (See our Technical Review of the Transports at the RR&A site).

While we have been fairly steadfast in saying its been too early to short equities, any technical break in the Trannies will be the first of our signals to place a bet against the equity markets.

Divergence: According to classical Dow theory, when the Dow makes new highs, we look for the Transports to confirm them. To oversimplify, we want to see more than goods just being manufactured, we want to see them shipped to retailers and sold to the end consumer. That should be reflected in the Transportation Index.

And its not.

As you will see in our technical review, the Trannies have failed to eclipse significant resistance at the 5,000 level -- on three different occasions. Further, the upwardly revised GDP should have been welcome news on the economy, including the Transports; Instead, the group sold off, and closed near the session lows.

Thereis a valid, secular uptrend line for the transports at ~4,400. A violation of that level would be extremely negative, not only for the group, but also for the market as a whole. It would signal more than a mere slowdown on the horizon. Amd if we learn that additional inventories are building, it would suggest the truck, air and rail companies are delivering inventory draw downs, as opposed to customer driven demand for goods.

Either way (bull or bear) there are two significant TRAN levels to watch: 5,000 and 4,400. The former suggests a continuation of the bull trend, while the latter would be a significant reversal -- and a time to begin placing index short bets.

My instinct tells me the soft landing crowd still has another rally left in them. Given all the liquidity thats circulating, this is certainly possible. But regardless, we are watching the Transports very closely for a technical signal.

In the Transport research piece, we examine the index more closely and list the technical rankings of each index member (0 to 100 scaled, 100 - the best, 0 - the worst).

-Barry Ritholtz
November 29, 2006

Technical Review – DOW JONES TRANSPORTATION INDEX

Wednesday, November 29, 2006 | 08:27 AM

in Economy | Markets | RR&A | Technical Analysis

Dow Jones Transportation Index (TRAN) – Daily Chart (2003 – present)

After a marvelous three plus year run, the Dow Jones Transportation Index (TRAN) recently formed significant resistance in the form of a double top (black arrows & red line) at the 5,000 level. After holding support along its long term uptrend (green line) on five different occasions (noted by the blue numbers 1 thru 5) the transports bounced back towards 5,000 and appear this time to be failing just under the 5,000 level (brown circle and arrows).

The validity of a trend line depends on the more times it is tested and five times makes this trend line very valid.

With the Index rolling over here and possibly heading back for a retest of that up trend line we would watch the trading activity very carefully over the next few days/weeks. Early evidence suggests the highs for some time may be in place near the 5,000 level however, a trend line break would be needed for definitive confirmation. Ironically on a day where GDP numbers came in higher than expected, which should be perceived as good for the economy, therefore good for transportation stocks, the index moved lower not higher. When the transports fail to rally on seemingly good news we have to wonder, are the good and services now being shipped excess inventories ? Or are investors not rallying the transports because the assume inventories are building ? Either way it appears the transports by its lukewarm price action are pricing in a slowdown.

Within the sector, the rails and truckers appear to be in the worst technical shape.

See our technical rankings below >>>

Technical Rankings for DOW JONES Transportation Index (TRAN)

Trash the Cash? Or take the money and run?

Monday, November 20, 2006 | 05:33 PM

in RR&A

NOTE: This Market Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on Mon 11/20/2006 5:33 PM;

>>>

I am hard pressed to recall the last time a) there was so much money sloshing around; and 2) people seemed so hell bent on getting rid of it.

According to Dealogic, the total dollar amount of deals announced since early Friday until this morning was around $88.5 billion globally; half of that pile of dough were transactions in the U.S. The value of global mergers and acquisitions for 2006 had reached a record $3.368 trillion, beating the previous high set in 2000 of $3.332 trillion. Much of these transactions were for CASH. Its as if these dealmakers all decided they wanted to Trash the Cash.

The surge is being driven by companies which after years of big stock buybacks and dividend increases, still have large amounts of cash on their balance sheets. The flood of money into private equity funds also needs to be put to work. (Indeed, one of the reasons the short sellers have been carried out on their shields is the ongoing bids caused by expectations of private equity buy outs.

Dollar Hot Potato: There are obviously two (or more) very different valuation metrics being done by buyers and sellers – and they seem to be reaching rather opposite conclusions. It makes me wonder if these buyers have become negative on the US dollar, and are seeking to swap out of greenbacks into hard assets – at almost any price. Note that since 2001, as the dollar fell, hard assets (Real Estate, Gold, Oil, Timber, etc.) all rallied strongly.

Lots of very smart investors have made recent bets against the dollar – Buffet, Soros and Rubin to name three – and have lost. Perhaps this is a smarter variation on that same investment theme. Don’t short the buck, but get rid of it before it devalues any further. Swap it out into hard assets (and dollar denominated ones at that) – Copper Mines, Chip Fabs, Office Buildings, Shopping Centers, Energy Reserves, Marine Tankers – ANYTHING but the dollar. It makes you think, doesn’t it?

Take the money and run? : Not everyone is dumping greenbacks for hard goods: Well worth noting is what some of the savvy players – the smart money – are doing. Some folks don’t seem to be too afraid of the dollar.

Take for example Real estate mogul Sam Zell: He has a reputation for being a very canny real estate market timer. He took his REIT company public in 1997, and now, less than 10 years later, he is a seller to Blackstone Group for $20 Billion dollars.

Selling commercial real estate interests at time when the Dow Reit Index (IYR) is hitting all time highs, the real estate market is softening, and investors are increasingly worried about a prolonged downturn sounds like the moves of a savvy player indeed.

~~~

Last week, many of you asked for several lower risk long trading and investing ideas. We have an opinion on 3 that are well worth considering: We posted these to the Technical Review section of the site. (In the future, you will get an email notifying you that a Technical Review was posted)

The three are:

1) Williams Cos (WMB) a $15B natural gas producer pipeline company

2) Mosiac Company (MOS) a $9B crop nutrient and animal feed firm that is expanding into bio-fuels;

3) eSpeed (ESPD) which creates “vertical electronic marketplaces,” and is an overlooked company in the very hot Markets sector. (ESPD was the Cantor Fitzgerald spinoff)

All three of these can be bought on pullbacks – investors can make partial buys (for entry levels and stop losses, see each report)

-Barry Ritholtz
November 20, 2006

Election Day (finally!)

Tuesday, November 07, 2006 | 11:08 AM

in RR&A

NOTE: This Maarket Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on Mon 11/7/2006 11:08 AM EDT;

>>>

I wanted to direct your attention to a few recent factors worth reviewing. As we noted in Technicals Improving, Economics Souring -- we continue to watch the disconnect widen between the charts and the macro-economic environment. Even Fed officials have noted that the data is much worse than originally believed.

If the disconnect was wide before, its a chasm now.

Since we last noted the improvement in the technicals, things have firmed up even further. Dollar flow into Domestic equity funds have picked up. More importantly, the May highs in the Nasdaq have been topped. By itself, that usually has very Bullish connotations.

Juxstaposed against that has been the deteriorating macro environment, and the Housing complex in particular.

Be sure to read today's What We Are Watching for a significant review of the overall sector. Its ever more apparent that not only are we not bottoming in Housing, but we are likely just getting started downwards. I would estimate that we are barely one third to one half way downwards into a typical down cycle -- and this cycle has been no where near typical.

This week becomes an intriguing one for traders: Whatever mad bidding for equities that took place in anticipation of the election should expire with the end of today's votiong. In the event of a loss of one GOP chamber (likely the House), we should expect some longer term repercussions for tax policy and stocks that may be less investor friendly.

Further, the "preternatural" bid that has tongues wagging all over Wall Street about the Not-So-Invisible Hand of the Plunge Protection Team should be assumed to be finished with their task. While we do not believe the markets have been manipulated, we have watched some of the harder to explain stock futures trading. To the trained eye, it sure did look like someone was on a mission. But it is not our job to delve into these shadowy conspiracies, but rather, to try and suss out how all the many elements will impact markets over the near and long term.

The most obvious one is "Gridlock." Most of the Street seems to be keying on the meme that "Gridlock is good."

That presupposes the present state of affairs is a desirable one, that trends are not moving us to a negative state, and that the expiring market-focused tax stimulus doesn't matter much. I disagree with all of those statements. Additionally, in the vent of a GOP loss, I cannot imagine that 2 years of subpoena driven investigations will produce a rosy environment for consumer sentiment and markets. Consider the psychological impact of non-stop televised hearings into 9/11, WMD, Halliburton, Katrina/NOLA, War Profiteering, etc.

At the same time, we can expect as major battle between Congress and the White House over subpoenaed documents -- and witnesses -- to end up in court.

As a political independent, I cannot say that I am impressed with the job done by the current Congress. But I also cannot say what awaits is any better (at least from a market perspective), and from a sentiment standpoint, could be much much worse.

~~~

Under normal circumstances, the penetration of the May 2006 highs would have ordinarily flipped us Bullish, at least for a trade for the rest of the year. But given the elections, the economic slowing, and the generally straight up condition of the markets -- note that we have yet to have a down 1% day since this rally started over the Summer -- we remain cautious.

This entire combination of factors remains rather unusual -- so we find ourselves holding off on that decision, at least for the moment. We will be waiting until after the elections, in particular waiting to see how this plays out for the rest of this week.

Go vote.

-Barry Ritholtz
November 7, 2006

Log in problem fix

Monday, October 23, 2006 | 09:49 AM

in RR&A

NOTE: This Market Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on Mon 10/23/2006 9:49 AM EDT;

>>>

A few weeks ago, we moved to dedicated servers. We did this to insure that site wouldn't encounter problems caused by anyone else, and to insure "maximum uptime." We also moved the domain to ritholtz.com from ritholtz.com/site.

Since then, numerous subscribers have been running into problems logging in. Account settings from the prior server host are the culprit, but firtunately, there is a very simple fix. To cure this, you need to clear out your old RR&A "cookie."

We put detailed instructions on the support part of the site. But to make sure that no one has any further log in problems, please follow these instructions:

For IE6 (Internet Explorer):

In Internet Explorer – select Tools from the top menu.
Select Internet Options.
Under temporary internet files, click the button marked ‘settings’;
Click ‘View files’
Find the file called Cookie:administrator@ritholtz.com/ and delete it

(Note that IE7 is still in Beta testing; Until it is an official release, we are not supporting it)

For Firefox:

select Tools from the top menu.
Select 'Options..'.
Select the 'Privacy' section at the top of the dialog box
Select the 'Cookies' tab.
Click 'View Cookies'.
Select the cookie file called 'Cookie:administrator@ritholtz.com/ in the ritholtz.com folder.
Click 'Remove Cookie'.

I am promised this will resolve the log in issues.Tech support informs me that everyone who has done this has had all of their log in problems resolved.

If you need additional assistance with this, please email our help desk (helpdesk@ritholtz.com) with a daytime telephone number, and they will walk you through this.

My apologies for the technical issues. Hopefully, this will be the last of these issues, and we can focus on what is going on in the markets . . .

Hedge Funds are in charge of the Rotational Market

Monday, October 16, 2006 | 11:59 AM

in RR&A

NOTE: This Maarket Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on Mon 10/16/2006 12:08 PM EDT;

>>>

We have a longer piece coming out later on the markets and the macro Environment, but I wanted to get a short note out today about some crucial issues ahead of us.

Before my parade of horribles, let me give you a half dozen positives:

- The Technical situation has become much more constructive;
- Sentiment, while Bullish, hasn’t crossed over to extremes (yet);
- Money Flow has seen some more cash head to domestic Equities;
- Option expiration can have a positive influence on equities;
- Commitment of Traders (COTC) are record long the SPX;
- Alpha (performance) chasing hedge funds are in charge of the short term.

These elements are the primary reason we are not short.

With these positives, why would we even want to think about selling, much less getting short? It’s due to the “disconnect” between reality and the markets – its now widening. The negatives are piling up so fast, it’s all we can do to keep up with them.

Two recent studies drew our attention: First, we note that Chief Financial Officers’ optimism about the U.S. economy has sunk to a 5 year low, according to a study by Duke University. Because of this, many are planning for reductions in capital spending and hiring.

You may be tempted to write off this negativity as the ordinary gloom of the green-visored number-crunchers. Hey, the bean-counters are always unhappy with spending anyway. We are better off looking at what the CEO’s– a generally chipper group by nature – have to say about the future. They tend to be much more upbeat.

Uh-oh. A recent survey finds that Chief Executive Officers has seen their confidence levels sink to five-year lows also. For the first time since the last quarter of 2001, gloomy responses from the big bosses outnumber cheerful ones. This according to (of all groups) the Conference Board, an outfit known for their cheerleading tendencies.

Given that the people in charge of spending and hiring plan on doing very little of each, one might think the stock market might be a bit more circumspect. No such luck.

The COTC – the so called smart money – are at record setting long exposure. That suggests that there is still more upside ahead. My best guess is through the election. But given how crowded the long side trade now is, risk remains high, with a low relative reward. As this plays out, a sudden correction remains a dangerously high probability event.

I’ll have more details, along with the academic studies that predicted the speculative echo, later this week.

Resilience or Complacency?

Monday, October 09, 2006 | 03:21 PM

in RR&A

NOTE: This Trading alert was originally emailed to subscribers at Ritholtz Research & Analytics on Mon 10/9/2006 3:28 PM EDT;

How is this for a weekend of news: Nuclear testing. Housing faltering. OPEC supply threats. BLS Data Revisions. Despite all this recent negative news, the markets were flat to up today.

When momentum is hot, none of this matters. No, it may not be rationale, but it is a very real phenomena, and is one of the primary reasons we are not yet short.

The economy continues to show signs of softening; Housing is not only fading, but accelerating downwards. Energy appears to be bottoming. And the mid-term election is looking to be a ugly Foley-driven affair. I am an Independent, but my working assumption is that if the G.O.P. loses control of the House (a 60% probability as I type this, according to Tradesports), the Democrats will open a series of investigations: On pre 9/11 warnings, missing WMD, the response to Katrina, and how the Medicaid Prescription Bill’s accounting was fudged.

Given all