Thursday May 31 Daily Market Assessment

Nothing Can Stop the Bulls!

Well, I'm convinced. After taking a couple of days off around the holiday weekend, the market came roaring back on Wednesday. First it got hammered on bad news from Shanghai, then it digested a weird report from last week's FOMC meeting. But when the smoke cleared from the bombardment, the buyers stormed the gates and drove all the indices into new highs. Both the DOW and the S&P hit all-time record numbers!

Even though the summer still looks to move sideways, as it usually does, I have to admit that only a die-hard pessimist would be bearish now. My equity positions on GOOG, VZ, VLO and CAT are all up strongly in just the past two days, and I think I'll break even on my options trades in May. I entered some of those trades with silly straddles and nearly got my neck broken. I'm strictly a vertical man, now.

Summary of Outlook: Near-term Bullish, Long-term Bullish!

Friday, May 25 Daily Assessment

First Wave has Landed!

Yesterday was quite a ride! Up nearly a 100, down almost as much. Not exactly what I expected, but close. It's not going to be an orderly retreat. Even today, I think we could see another up day, based mostly on M&A optimism. Coke has announced a major $4.1 billion dollar acquisition, which will tank KO, unfortunately. But the market is overbought by any standard measure. I'm evacuating my long positions, falling back as it were to a more secure level. I predict that SPX will drop back to its level of support at 1500 over the next few sessions, and the DOW should find solid ground at 13,300. But probably not today.

Today is the beginning of the first summer holiday long weekend, however. I don't expect significant trading volume unless there is a genuine downdraft of 200 points or more. Today is a day for unwinding positions. I'm exiting my June longs, and taking profits on my oil stocks. If GOOG retreats a little, I think I will take a major position there; GOOG is overdue for a leg up, and the internet stocks are on fire (relatively speaking).

Summary Outlook: Short-term bearish, long-term bullish.

Playground Lessons of Life

My Momma didn’t teach me much;
I learned everything on the playground.



1. The bigger kids run things;

2. You need to know the rules of any game to win; life is a game;

3. If you can help make the rules, you will be more successful;

4. You don’t always get picked to play; learn to entertain yourself;

5. Life’s a lot more fun if you have a buddy;

6. Girls aren’t as big or strong or as fast as boys; sometimes they’re smarter;

7. Avoid playing a position you play poorly; for that matter, avoid games you play poorly;

8. You learn better by doing something, not by watching someone else;

9. When you pick a team, your first choice makes a huge difference;

10. Some people aren’t as smart as you are, but some are a lot smarter; be their friend;

11. When you promise to do something, do it; you earn people’s trust by keeping your word; the only people to trust are the ones that keep theirs;

12. Only your mother likes to hear you cry; don’t waste time on the playground;

13. Telling the truth is easier than lying; your memory isn’t good enough to lie well;

14. Always know the way to get home by yourself; you may have to, sometimes;

15. Your reputation is the only thing you carry from year to year; if it’s a good one, you have to live up to it. If it’s a bad one, you’ll have to overcome it.

May 21 Daily Market Assessment

No Downturn on Friday, but...

I'm still waiting for a retracement. Here's why (From Briefing.com):

Earnings growth is slowing. There are clear economic risks. Geopolitical issues are serious. Yet, none of these seem to matter to the stock market. Every time the market takes a dip on bad news, it is seen as a buying opportunity. Long-term optimism is overpowering the fundamentals. This increases risks.

A Synopsis of Our View
We have written frequently the past few months that the stock market has gotten ahead of the fundamentals. We still strongly believe that is the case. Yet, at the same time, we have retained our Market View rating at Moderately Bullish. This is because the market momentum is very strong. We haven't dropped our market rating because we recognize that the stock market doesn't move in lock-step with the fundamentals. There is no sense fighting the trend.

Furthermore, valuations are reasonable. Not great or compelling, but reasonable. There is still plenty of liquidity looking for investments. This is particularly true in terms of private equity and corporations with very strong balance sheets. This is driving the acquisitions that are helping to support stock prices. Individual investors are also continuing to invest in stocks as the alternatives in bonds and real estate are less attractive. Thus, while there is a very good argument that the stock market is becoming somewhat overvalued, there is also the simple fact that overvalued markets tend to become more overvalued. This is particularly true in periods when there is a high degree of liquidity.

Weaker Fundamentals Can Not be Ignored
It is our job to present analysis to help readers make better investment decisions. As such, it is important for us to stress that the fundamentals have worsened.

Earnings growth is clearly slowing down. The approximate 8 1/2% earnings growth for the first quarter was met with great enthusiasm in the stock market, but it was no greater than what was expected at the start of the year. It is down from the double-digit rates of 2006. Further declines to growth of 5% or less is likely in the second and third quarters. Earnings growth is being squeezed by slower revenue increases and some margin pressures.

There is additional risk to the economy near-term that threatens to further harm earnings. Consumer spending trends are fragile and rising gasoline prices, slower employment growth, and the ongoing housing slump threaten to dampen growth.

The interest rate outlook has also worsened. It is now a year since the stock market started anticipating a Fed rate cut "a quarter or two down the road." Not only has the rate cut not come, but the most recent policy statement shows no leaning towards any easing.

Not to Worry
The general reaction in the stock market is to view all these events in the most positive light possible. The first quarter earnings were met with huge cheers even though it was a typical quarter in terms of the number of companies beating estimates and the amount by which earnings beat aggregate forecasts.

The economic data haven't sparked any stock market rallies, but the disappointing trends haven't hurt much either. Real GDP growth in the first quarter of this year was at a very disappointing 1.3% annual rate and forecasts are for about 2% to 2 1/2% growth for the second and third quarters. That hasn't slowed the stock market rally at all.

Most interesting is the continuing optimism about a Fed rate cut just around the corner. On Friday, the stock market rallied after a modest 0.2% drop in April retail sales. This was widely reported to be due to the fact that the weak number increased the likelihood of a Fed rate cut.

This was absurd. The day before, the stock market tanked on weak data from retail chains on April same store sales. There was no talk that day of a Fed rate cut. One day, weak retail sales were bad for the market. The very next day, the same type of data was very good for the stock market.

Sentiment Trumps the Fundamentals
The market rebound on Friday had very little to do with the fundamentals. Instead, it was simply the underlying bullish sentiment reasserting itself after a market decline. The stock market rebounded sharply and steadily following the February 27 plunge sparked by the sell-off in the Shanghai market. It has rebounded after every smaller dip since then as well.

Traders and investors are once again being trained to view every dip as a buying opportunity. The constant headlines of the Dow or S&P hitting new highs is keeping sentiment positive. Complacency has set in about the fundamentals. They don't matter right now. The thinking is that everything will be fine in the long run. Stocks always go up.

What it All Means
We aren't complaining that the stock market isn't responding rationally to the fundamentals. This happens all the time. We also aren't saying that a bubble similar to the late 1990s is forming. At worst, this is a process of moderate overvaluation.

Yet, the S&P 500 index has run up 22% since the lows of mid-July last year. It is up 6.2% so far this year, equivalent to a 16.5% annual rate of increase. This has occurred amidst a stable interest rate environment and a worsening earnings outlook. The market is clearly outrunning the fundamentals.

Investors need to understand that they aren't getting bargains on stocks right now. They also need to understand that sentiment shifts occur. If one occurs now, the downside risk is increased by the fact that stocks have gotten ahead of the fundamentals.

For now, we are retaining our Moderately Bullish view on the stock market. We are also maintaining our extremely cautious stance with a sharp eye towards anything that could undermine the current momentum. The longer the stock market outruns the fundamentals, the more the risks increase.

Summary: Short-term Neutral, Long-term Bullish

May 18 Daily Market Assessment

Sell in May and Go Away

Well, we had our second distribution day (higher volume, negative A/D) earlier this week, and now we're poised for a definite downturn, albeit a short one. Thursday saw the markets using weak volume to get back to even after stepping down sharply in mid-day. The DOW and the NASDAQ are over-bought by every measure, and the number of blue chips putting in new highs has been in steady decline all week. The NASDAQ, in particular, has been hit with heavy selling.

Furthermore, there are no more good earnings or economic news reports in the offing, and option expiration always brings sellers back into the equities market. I don't know if it will happen today (likely) or next week, but it's time to "Sell in May and Go Away". I believe that we are at or very near our 5-year highs in the major indices, and that it probably will be late September before we move past them again, since August earnings in key industries (retail, consumer goods, housing, healthcare) will be lackluster.

All that said, I see some selective opportunities. I plan to take long positions in steel and oil, and to begin building positions in a few key stocks that have made retracements to their 50-day moving averages, or just below: PCLN, VSEA, BLUD. Also, bear put spreads are in order for AAPL and SBUX.

Summary: Short term bearish, Long term bullish.

May 11 Daily Market Assessment

First Distribution Day

As forecasted, on Thursday we finally got our distribution day (i.e., a day of above average volume, plus more decliners over gainers). I actually thought it would occur on Wednesday, but I guess the fund managers needed an excuse to start selling, and the weak results from retail (especially Wal-Mart) was just enough to push the boat over the falls.

But this may not be enough. Although today will probably see a bounce-back, more consolidation seems necessary before moving further up. I look for sideways movement for another few days, then another strong move toward 14,000 on the DOW.

May 8 Daily Market Assessment

Slow down; yellow light ahead!

With recent gains, the U.S. markets have confirmed their primary uptrend. Specifically, the Dow industrials and the Russell 3000 have carved out all-time highs, while the Nasdaq and the S&P 500 have each notched six-year highs. And while a near-term pullback is a little bit overdue, the more important longer-term trend remains higher.

After holding support last week around 1,475, the S&P has spiked to six-year highs, clearing the 1,500 mark for the first time since September 2000. From current levels, first support holds at former resistance around 1,498. Meanwhile, the Dow industrials notched another all-time closing high on Monday, ending at 13,312. Furthermore, recent pullbacks have been unusually shallow, creating tight trading ranges at progressively higher levels. That means despite its steep rally, sellers remain conspicuously absent, even with Tuesday's yo-yo down and up day.

All of that notwithstanding, it's time to issue a caution signal. CSCO and DIS disappointed somewhat on Tuesday, and the Fed is going to issue some blather about inflation being a concern. I suspect that this will be enough to bring the sellers back into the market, and I look for at least two distribution days this week.

Summary: Still bullish long-term, and bullish short-term as well (but with tight stops)