Bad Data, Who Cares?

A strong market did what it was supposed to do today…ignore bad news.  The Dow had its 4th straight week with gains.  The last time that happened was October 2007.  Uh oh, remember that was the high in the stock market around 14000.  Since that time, over 5 million jobs have been lost and a fortune has been lost in the markets by millions of people (billions if you include China).  More jobs were lost in March as the economic data that was reported showed an unemployment rate of 8.5%.  The rest of the data this morning was downright awful.  If you’re somebody reading this that has lost a job recently, these aren’t just numbers.  We often look how we can make money from all this data but these are real people losing their jobs.  Let’s all keep that in mind.  I believe the reason the market rallied today was because the data was pretty much just what everyone thought it would be (No surprises in other words).  As I mentioned yesterday, a strong market ignores bad news and spins it into positive news.  Traders spun it today by saying “maybe the worst is behind us”.  The reports this morning were definitely bad news though.  

What I find fascinating about this rally is looking at exactly what is rallying the most.  Did anybody happen to see those boring old Dow Jones Transports yesterday, up 8%? Don’t look now, but the market is pricing in a big economic recovery.  Transports up, commodities up, and cyclicals up.  I think a lot of investors that are buying “the economic recovery story” with no exit plan may end up losing a lot of money if indeed the economy gets worse.  On the other hand, if the economy’s going to look a heck of a lot better in nine months than it does today, then bidding up those stocks right now is the correct move.  One or the other has to happen.  A big economic recovery or a false rally that should be sold.  Here’s the way I’m playing it.  I trade based on what is happening not what should be happening.  I have no idea what the economy will look like nine months from now.  Neither do you and neither do those people buying the cyclical stocks.  That doesn’t mean we should avoid them but it does mean don’t assume the worst is behind us because we simply don’t know.  This is a real rally and there’s been plenty of time for all of us to make good money.   But, I have no illusions in thinking that we can’t fall and fall hard.  

As far as the short-term, we’re getting extended but I still don’t see any signs of the market tiring out.  More and more stocks and sectors are participating, we’re seeing more risk taking, and money is pouring out of treasuries and gold (fear trade) and into equities.  The bears have yet to muster up anything other than two day sell offs.  But, there are a few red flags.  First, this has been a fierce rally off the lows and one of the biggest ever in the short amount of time since it started.  I believe this is the best four week rally for the Nasdaq ever which was started in the 1970s.  So, a pullback is getting almost necessary at this point.  Secondly, the stocks trading above their 40-day moving average is about 83%.  This is generally when we begin to see a pullback.  I went back a few years to see the times we went up even higher than 80%.  In 2003 (the beginning of a good strong market), this number was over 90% before the market took a pause. There was a lot of money made between the time the market was overbought and really overbought.  So, selling just because we’re overbought by various metrics isn’t the answer.  If you’re concerned we’re about to rollover, use stops or some other exit strategy.  But, certainly don’t just sell out right now just because we’re overbought.  Overbought markets stay overbought when times are good.  The last red flag is the fact that although we’ve seen some great demand for stocks, the supply of stocks hasn’t come down showing  there plenty of people ready to sell when need be.  There are two parts to a really good bull market, broad demand and diminishing supply.  So far, we have 1/2 of the equation.  Bottom line is to have an exit strategy.

Technology

A few weeks ago I wrote that commodity and commodity related stocks looked really good.  Now, I’m seeing some impressive moves and charts in the technology space.  Research In Motion (RIMM) stole the show today, up over 20% after reporting earnings last night.  That set the stage for today’s move in the overall market as I thought it would.  But, looking around the technology sector, I see stocks like Dell (DELL) and Nvidia (NVDA) moving up and looking as if they can move much higher.  I think you have to continue to rotate out of extended stocks and move into stocks that aren’t extended or are just now breaking out to the upside.  Dell is a pure value play.  I had a caller on my radio show ask me about Dell this morning.  I told her it was a nice looking chart for a trade and she could probably make 20-30% more at least.  However, I still have big reservations about it as a long-term investment.  They haven’t wowed anybody in years. They are in a commodity business.  And although they do it very well, they have to really reinvent themselves and reinvent the PC to go to another level.  But, the fact that they are so cheap on a valuation basis with all the cash, etc., the stock can run up quite a bit even if I’m not in love with the company.  I bought some Dell bonds this week for an investment but I haven’t bought the stock yet.  But, the chart looks great on Dell.  As far as Nvidia, it just broke above its 200-day moving average and looks poised for more gains perhaps after a brief pullback if we’re lucky enough to get one.

Have a great weekend.

This post published at www.karleggerss.com

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