One More Time?

The Bulls believe this is the beginning of a multi-year expansion; the Bears think its the end of a cyclical run. Frustration levels on both sides are palpable. It may turn out that both sides are correct, only using very different time frames.

Looking towards the 2nd half of the year, we view the market’s prospects as dimming considerably. Risk levels are high, complacency reigns, and the Bull itself is ragged and aged. That’s before we get into the structural problems of the economy, trade deficits at record levels, and current account balances a mess. The Federal deficit is worsening. A bloody and costly war is sapping dollars that could be put to better use elsewhere. The dismay over the Iraq situation is causing the President’s polling to reach its nadir since taking office; worse yet, the sentiment decay is spilling over to consumers. All this as the prime drive of the economy – Real Estate – shows every sign of rolling over.

Over the shorter term, prospects viewed through a technical lens continue to show signs of resilience. The advance decline line has improved. One day reversals and negative outside days have been shrugged off. There’s plenty of liquidity, with cash looking for a place to go. Money flow remains strong (albeit targeting emerging markets). The Dow Transports have broken out. Action in the Option pits has been mildly bullish. While the bearish camp describes this as complacent – and they are correct – one still must respect the underlying strength revealed. More significantly, the S&P500 is now up for 5 consecutive months. If the trend is your friend, your friend has been telling you he markets want to go higher. A plethora of bad news has been absorbed, and still, the market powers on.

For those who believe that the market is in the 9th inning of its bull run – present company included – there is the real possibility of yet another leg up. Indeed, the underlying strength argue that the timing of the top could be further into 2006 then we previously imagined. While we haven’t hit our original 2006 price targets – 11,800 on the Dow and 2600 on the Nasdaq – they remain possible 1H 2006.

All it would take for that to happen would be reassuring comments from Bernanke & Co. tomorrow. One last lunge upwards remains a very realistic possibility before any top is put in. In the face of the new Fed Chief’s 1st policy statement, we suggest a more hedged stance than a naked short one. Nimble traders can get long. Watch 1294 on the SPX as a bearish signal, and 2320 on the Comp as a bullish one. Either side getting penetrated moves us away from a hedged strategy and more towards a naked positioning.

note:  this was emailed 3/27/06 ~noon

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  1. Bynocerus commented on Mar 28

    For years, I’ve wondered if the post bubble period would play out like the 1930’s here in the US or more like the 1990’s in Japan. At this juncture, the answer appears to be neither. There’s an echo bubble of sorts in the Russell 2000, and the Spyders and Qs trade at 25 and 39 times earnings, respectively. However, there’s neither been a huge run in the Naz nor a spectacular collapse.

    Because I’m a quant dork, I like to apply statistics to lots of things. One of these things is the NCAA tournament. Over the last five years, I’ve called four out of five NCs (I picked Kansas in ’03), and 13 of 20 Final Four teams. However, this year, I didn’t get a single team in the Final Four (I had Nova, Kansas, UConn and Texas). Does this mean my methodology is flawed, or simply that this was a “black swan” tournament for me. The fact that only 4 out of 3 million people called the NCAA tourney correctly so far over @ ESPN makes me think it’s the latter.

    Does that mean I should have loaded up on George Mason at 250:1? Or that any of the Final Four teams is even a top four team? No and no. By the same token, there’s a possibility that the Naz could make a Mason-like run here against all odds to 2600 or higher. However, I would suggest that the risk level here is something like picking a Florida-LSU NC game. Sure, you might be right, but would you really risk your hard-earned dollars to be right?

  2. D. commented on Mar 28

    In the short term, you get M&A and cost cuts which are positive for profits and stock prices.

    But in the mid to long term this scenario implies more wage cuts and evaporating benefits (i.e. Delphi, car industry and trickle down effect).

  3. Chad K commented on Mar 28

    Feel free to post your short Qs again, Barry. :)

  4. Emmanuel commented on Mar 28

    …worse yet, the sentiment decay is spilling over to consumers.

    Not quite, if we listen to the Conference Board’s sentiment
    . But then again, aren’t these the folks behind the leading indicators index?

    The Conference Board said that its consumer index shot up 4.5 points to 107.2, the highest level since May 2002, when the reading was 110.3. Analysts had expected a reading of 102.

  5. Mike commented on Mar 28

    Waiting for the “big one”. Barry, this is getting depressing. I’m with you on the market declining
    and have to say it’s hard work being be a bear.

    FWIW, the volume on the up days has been declining.
    I just keep crying in my beer waiting for the shit to hit the fan.

    Why do these things take so long? As I do for all things, I blame George W. Bush.


  6. B commented on Mar 28

    The market definitely has the mojo. Err, did have the mojo. “Has” implies it will continue and we have no idea what it will do. Sentiment surveys, options readings, etc, are all worthless in this market. The readings are all over the map. They were uber bullish a few months ago and the market didn’t go down but a few points. Then they went reasonably bearish and the market didn’t go up but a few points. I could cite sentiment indicator after sentiment indicator that is contradictory right now. These same indicators were flashing buy signals at times of the 2000 top and 2001 top. Goes back to “The market can remain irrational alot more than you can remain liquid.”.

    I will say that there is a general feeling of euphoria in actions. Period. The sentiment is in the tape and is measured with quantifyable market action. But, doing a Wyckoff-ish analysis of volume shows this rally is the weakest in years. So, is this a rally that has not been accepted yet so has more fuel or a sucker’s rally where the smart money isn’t participating? Marry 2+2 and you come up with the latter. Remember we are generally pushing a string over the past few months as new highs are awful. ie, The indices are grinding higher but the majority of individual stocks are just being pushed up and down without making true progress.

    The reality is we are really painting in a range in the general indices over the last two years. A breakout is not ten points on the S&P over two years ago. Especially since it is in the same bearish channel. That means most general mutual funds are performing poorly as well. The theme is the same theme that has worked for three years. If we don’t get some new market leadership, we are screwed because these old themes are blow offs by historical quantitative measures. And, the smart money is paring back in those exposures while we make marginally new highs. That said, the NDX pattern is too blatant to be trusted as some type of H&S top. Doesn’t usually happen so elegantly. (Look at the Housing Index that refuses to crater.)

    The small caps have experienced tremendous PE expansion over the last few years and are truly in bubble terriory as Byno mentioned. There’s no sell signal that has developed as I expected but……..It takes one piece just a week to fall into place for a top to be set. May never come. I guess we just might go up forever since this is the longest period in over 100 years without a 10% correction in the Dow or S&P as far as I can tell.

    Trade deficits and national debt are poor historical correlations to market activity. In fact, the markets have historically done extremely well when our debt has ballooned. Twice historically I can cite when national debt increased 600-900% in a relatively short period of time and the markets exploded. That’s because behaviorally it takes crisis to affect change and massive debt build ups usually affect serious policy change. Ditto with housing. I will also say that US manufacturing is still very vibrant and as a percent of GDP is still similar to historical levels. And, just like the historical patterns, manufacturing has a reasonable change of even becoming much more resurgent over time for many reasons. All of these comments refer to the statement that trends never last forever.

    Will we see a recession or worse? Maybe. Likely? Unlikely? Will we see Dow 12000? Could. Swonk might be right. But then, when we have seen a certain situation arise as has happened this past two weeks, we usually get a correction of some sorts. Temporary or top? Uhh…

    This is one for the ages. Someone on CNBC is arguing to keep the minimum wage low because raising it would mean that low skilled worker’s jobs would go away with automation. Huh?

  7. jim commented on Mar 28

    Looks like they are betting on hugs and kisses from gentle Ben.

  8. emd commented on Mar 28

    Look at the nooner rally….. Could this be the start of something new?

  9. Get Long Vega commented on Mar 28


  10. emd commented on Mar 28

    in case you haven’t noticed, Get Long Vega, bears suffer from battered spouse syndrom.

  11. thecynic commented on Mar 28

    i would point out that we have had numerous “break-outs” since the rally off the low in 03. this one is more of the same. short squeeze + hedge fund programs on light volume. its obvious. the noon rally today was a perfect example.
    what we forget is the whole move from the 03 low is completely inflation motivated. the S&P adjusted for the inflation (i’m not talking about the CPI) is flat for the past 3 years. you would have been just as well to buy gold as to buy the S&P.
    if the Fed could simply devalue the dollar everytime it wanted to get stock (asset) prices up we wouldn’t operate in a free market. maybe we don’t…..

  12. MAS commented on Mar 28

    GET LONG VEGA – nice Animal House reference!

  13. pete Preissle commented on Mar 28


    re: “the timing of the top could be further into 2006 then we previously imagined.”

    Glad to see you moving towards my take on the timing.

  14. Leisa commented on Mar 28

    I’m surprised that the market is surprised by the Fed’s comments. The market, foolishly IMV, was HOPING for some temperance of future interest comments. I’m not sure what basis that hope was resting on. But what do I know?

  15. Andy commented on Mar 28

    I’m surprised you are surprised the market was surprised. The market wasn’t surprised. The market knew what would happen and this move was pre-ordained. The real question is if the people who pushed it down can keep it down.

  16. CHRIS commented on Mar 28


  17. pete Preissle commented on Mar 28


    As you said, the market wanted a tip from Benny & the Feds (one of Barry’s favorite rock groups) as to when the
    raises might end.

    When it didn’t get that, the knee-jerk takedown was, as Andy said, pre-ordained.

  18. apav commented on Mar 30

    Let’s see: Tuesday SPX closed under 1294. Wednesday the Nasdaq closed over 2330. Now is that bullish, bearish or just stumbling along.

  19. Phil commented on Mar 31

    Nice Blog.

    I’ve been citing the Nikkei as my thesis for Dow 15,000.

    We are currently 50% behind Japan and that just makes no sense, either they pull back or we pull up.

    – Phil

  20. rmauser commented on Apr 3

    EMD, Andy,
    Uhm…. The Germans did not bomb Pearl Harbor. The Japanese did.

    Apav, If you take the Nikkei225 at a 5% appreciation from its pre-bubble (1984), it would be at 29,000 now.
    If you took the DJIA at a higher 8% appreciation (WTF) from a pre-bubble date (1982), it would be at 5,700 now. 12%, 13,600 now (figures not adjusted for inflation) I think the the media is downgrading expectations toward an 8% long term return.
    I think we have a bit more mean reversion to go.
    Simplistic view. I’m a simple guy.

  21. Linsday Fox commented on Apr 5

    We’re open to all discussions. But any meeting will have to be on the basis of withdrawing the First Job Contract. There have been five one-day public sector strikes in which millions of workers and students took part. An employers group has warned the protests are starting to hurt the economy. No Pasaran!

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