Not As Good As It Looked

The market just continues to go up. No matter which bank needs to raise capital and no matter how many people are losing their job and no matter how much inflation there might be over the next several years, stocks continue to get bid up. Let’s first realize we need to respect that. If you’re a bear, you’re starting to wonder. Trust me, I’ve talked to some really bearish people who are beginning to ask questions. That may be the sell sign we’ve been looking for. But, back to the market. The sideways action we got for about 10 trading days in late April has resolved itself to the upside. The stock market paused and then broke out to new highs. It’s been as persistent lately as the bear market was in the fall. Remember when it just wouldn’t rally. Now, it just won’t sell off. Or will it?

 Today’s rally appeared to have everything you’d want. We had a leak that Bank of America could need an additional $32 billion and potentially nine other major banks may need more capital as well. Then, we had another 500,000 (estimated by ADP) losing their jobs in April. And yet the market ignored that. That’s exactly what a good market does. It ignores bad news. But, looking at today’s rally, the supply/demand internals of the market weren’t that impressive. You can combine that with the low volume, overconfidence by investors, and other indicators I watch, and you have even brighter red flags than yesterday. I believe we are setting up for a correction very soon. When that correction comes, when is time to buy. Well, if this truly is a new market, then the 20-day moving average on the SPDRS (SPY) looks to be a logical place for new cash to be put to work. That would be about $86 (currently $92). A healthier pullback would be to the 50-day moving average which is around $80.50. That’s closer to a 50% retracement. In addition, the 200-day moving average is staring us in the face at around $95.

It will also be interesting when we got the pullback if some of the value names began to participate. Healthcare & consumer staples haven’t run up like the cyclical during this rally since March 9th. In a new bull market, usually everybody comes along for the ride.

My strategy is to be patient. I’ve been building cash but also not afraid to buy good looking charts. BIDU, China, & Eastern Europe to name a few. They continue to perform. Last week I mentioned natural gas as a trade and I bought some. It’s been skyrocketing since then. The more I look at natural gas, the more I believe it could have bottomed for good. Too early to tell but the 50-day moving average will be the first test. I don’t mind committing new money in areas that are less susceptible to a correction. I certainly wouldn’t be shorting but be patient.

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May 2009
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