Sunday, July 15, 2007

The Market Fools the Bears

Yes, in early June the market was "teetering on the brink of a larger correction" as I posted then. I noted that it's been to the brink and pulled back from that brink before, and sure enough, that's just what it did. Then the last week of June it went to the brink again, only to pull away again.

When a market advance gets to the "overbought" stage (having risen relatively far and fast), generally it has to take a rest. It can do this either by declining or consolidating. In June the Dow went into a 400-pt consolidation, bouncing up and down within that range. It was unclear which way the stalemate would be resolved. In some cases, sell signals turned into buy signals and then went back to sell again.

The big 283-point advance last Thursday was certainly a positive. The Nasdaq continues to do even better than the Dow. The big multinationals, and high tech stocks, continue to lead the market as I have emphasized in the past. For example, a popular ETF for semiconductor stocks (SMH) has outperformed the S&P 500 by 2-to-1 this year.

Traders aren't quite sure what to make of this market, but most of the indicators I watch turned positive within the last 10 days or so. Longer term indicators never did say to sell.

Here is a sampling of information I'm getting right now:
  • Many newsletter writers are bearish, which actually is bullish for the market. In fact, at the start of trading last Monday we were facing the heaviest S&P 500 shorting in 5 years. So of course the market fooled all those bears. It's quite good at fooling the majority.

  • The breakout from the trading range could move the Dow about 1000 points in whichever direction the breakout occurs. [And it occurred to the upside.]

  • Big traders and hedge funds are borrowing Yen at near-zero interest rates and buying stocks, and until the Yen starts increasing, that will continue. But when the Yen moves up substantially, watch out.

  • Fewer stocks are rising. [This is typical behavior before the general market goes into a correction.] But those stocks with good earnings will attract more and more investors, pushing them up even more. Those are the stocks you want to own right now. Strong earnings can still buck the overall trend. We are entering the period of quarterly earnings reports now; expect a number of pleasant surprises in those earnings.

  • Late June into the first half of July is typically a strong period for the market. But the 2nd half of July is typically weak.

  • One short-term target (days to weeks) shows the Dow climbing another 250 points from here. A longer-term target (weeks to months) puts the Dow at 15,000 (up 1,100 points from here).

  • The market is quite over-complacent and vulnerable for a move lower.
So it looks like it's not time to sell, but it is time to maintain some caution.

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