Analyze This: Technicals versus Fundamentals

Analyze This: The markets continue to show impressive resilience, despite ongoing mediocre economic reports. As mentioned last week, the market was overbought and due for a digestive pullback. Even Monday’s hefty pullback was on light volume.

The internals of this last rally have been better than any of the previous bear market bounces, and that factor is one of the more Bullish issues facing investors. Based upon a variety of indicators – A/D line, up/down volume, new highs/lows – the internals look solid. Pullbacks remain shallow and on light volume, with an apparent ready supply of buyers below.

Asides from the Technicals, the market has a variety of things going for it, at least over the intermediate term: An accommodative Fed (Interest rates and Money Supply), Congress (tax cuts) Treasury Secretary (Currency) and White House (Dividend/Capital Gains Tax cuts) are pulling out all the stops to get the market and the economy moving. This should have positive effects going forward.

There still remains areas of concern: Some savvy economic observers expect to see little in the way of growth or inflation, most notably, Bill Gross. Agree with him or not, Gross is a guy who cannot be merely ignored. For better or worse, he controls ~$400BB – he makes the market, he does not follow them. If you think that is trivial, consider that his net assets are 10x that of Buffet’s book value.

Sentiment is also a bit befuddled: IIAA sentiment survey shows that bulls now number 56%, while the bears are down to a surprising 20.9%. That’s the lowest level since the 19% reading, circa 1987. That excessive sentiment is troubling from a contrarian perspective; Bull markets do not typically begin with only 19% Bears. With self-admitted Bears so few, surprisingly, the put call ratio has moved up to higher levels. This suggests the “wall of worry” is being rebuilt. That’s a necessary component of a sustained advance. Contradictory and worth watching.

The last technical concern is a lack of confirmation by the Dow. It hasn’t kept up with the other indices. That doesn’t mean the market cannot reverse itself here; However, patient investors might scaling in between here and a better entry point – more towards the 8200 level. That ensures that if this pullback is indeed shallow, traders will have long positions to take advantage of the move.

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Quote: “”Power is not revealed by striking hard or often, but by striking true. –Honoré de Balzac, 1799 – 1850.

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