Time for a Pullback

One of the fascinating things about the equity markets is
how so many different methodologies very often reach the similar conclusions.
After a significant run up from the pre-market London bombing related panic,
the markets now appear overbought and in need of some consolidation.

This is based not on any specific market reading, but rather
on a variety of different gauges:

• The last few days of the advance has come on decreasing
volume, never a good sign for the short term;

• The length of the recent move suggest it is getting tired
and due for a rest (See Jeff Saut’s “day count”);

Dick Arms notes his Trin (or Arms) Index for both the NYSE
and Nasdaq are in the overbought area;

• Cycle Forecaster Charles Nenner observes that cycle work
suggests softness until the end of July;

• Kevin Lane of Technimentals notes that markets are near
their upper ranges with resistance just overhead;

Bearish sentiment is at an
extremely low 14%;

• VIX at a 9 1/2 year low;

Carl Swenlin nearby chart reveals excessive bullishness
(UPDATED: JULY 18, 2005 2:35pm — Decision point discovered their chart contained a a bad data point; DIsregard this bullet point)

Given these 7 6 7 factors, coming on top of the post-London 7/7
run, the markets are overdue for a pause.

The reasons these different approaches on occasion yield
similar perspectives is that they are all based on the same data sources. After
all, Market action primarily consists of price, volume and time. With the
exception of sentiment surveys, these other approaches rely primarily on these
3 key components.

Given the lack of significant economic news this week – and
the tendency of Greenspan’s Congressional testimony to grind trade to a slow
drip – the market will be looking towards earnings. So far, the impact has been
company specific. That leaves the aforementioned sentiment as well as
technicals to be the key drivers this week.

Longer term, corporate balance sheets are clean and cash
rich, the consumer is still carrying the entire economic load. Unless and until
we see real hiring and CapEx spending by companies, the jury remains out on the
expansion continuing very deep into 2006.

Our investing posture is as follows:

Short term, we expect
some weakness, as markets work off their overbought condition.

we believe the rally can continue into the mid-Fourth Quarter, and advise using
the short-term weakness to add to long positions.

Longer term
, we are less
sanguine about 2006 than our more Bullish peers. We suspect the market might be
topping out around November.

Plan accordingly.

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What's been said:

Discussions found on the web:
  1. muckdog commented on Jul 18

    I think we’re on pace for about a 6% rate of return in the diversified index. It probably be on either side of that, hopefully up. But I’m not sure how bad that would be in a low-inflation environment.

    I keep looking at those job numbers, and wonder when we’ll be seeing overheating with all this cheap money and deficit spending. This expansion is getting long in the tooth. Maybe it’s oil prices keeping a lid on it.

  2. dd commented on Jul 18

    I drive a lot and there is NO expansion outside of major cities and monied protected areas. I’m enjoying the ride for now; but the great American driving culture is really already dead; the tolls are skyrocketing and gas is an upper middle class ride. Bye Bye Miss American Pie.

  3. nostradamus commented on Jul 18

    The market will top out at 1254ish sometime b/w now and late Aug. Then it will very quickly return to 1140, a 9-10% drop, by Oct.

    I am unclear whether it will need to lower than 1140. If so, 1060 or 1090 are the targets.

    The dollar will flirt with 95-100 before the end of 2005. But will fall again in earnest back to 80 by the end of 2006.

    A good low will form in late Jan 2006. 2006 will be volatile but ultimately bullish. The SPX will make a return trip to 1500 sometime in 2007. The Dow will make a new all-time high.

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