Why Some Rallies Must Go On Without Us . . .

NOTE:  This Trading alert was originally posted at Ritholtz Research & Analytics on Fri 7/24/2006 7:33 am EDT; An email went out to subscribers alerting them shortly there after.

This is posted here not as investing advice, but
rather as an example of a trading call for potential subscribers. We
expect to post future advisories in a similar manner — after the call,
but in the correct chronological location on the blog.

One of the issues investors face is the "uncertainty" of the future. Since the future is inherently unknowable, some advisors say, then you might as well just buy the dips and not try to market time.

We look at things from a different perspective. All market environments are not equal. Some offer higher probability set ups for investing; While others are mere coin flips. We prefer when making entries into equities to look for set ups that are better than even money. We like to see either an established uptrend, or conditions that are so deeply oversold as to offer a high probability of success.

At present, neither of those circumstances exist. Markets have been choppy, range-bound, volatile. The "One-day Wonder" last week alleviated much of the oversold conditions that existed. we noted previously that prior to that rally, markets were not nearly as oversold as they were on June 13.  That doesn’t mean they cannot go higher, but it also suggests that the moves will be jerky and unreliable.

Additionally, several technical issues continue to bother us: On Friday, we saw the Dow Transports, breaking their June lows while the Dow Industrials bounced over the June lows. This is rarely a good sign.

Recipes for durable market advances include expanding new highs, expanding overall volume, and advancing volume consistently ahead of declining volume. To quote John Roque, we are getting none of that here.

Thus, we see no technical reasons to rush back into the market at the moment.

This approach means that on occasion, the markets may rally without us. But it also means that over time, we are much less likely to get suckered into false rallies.

Much of the bull case relies on 1) The Fed pausing or stopping; 2) Another double digit earnings period; 3) A quick end to the turmoil in the Middle East.

All three of these beliefs appear somewhat misguided; In the majority of the time, the Fed stopping bodes ill for equities; To many bellwethers have cracked for me to think much of S&P500 earnings going forward;

As to the quick end of the war, consider:  The ground war in Lebanon and Israel just started. I do not see the odds favoring a quick resolution.  I would be surprised if US Secretary of State Condi Rice’s calls for a cease fire are heeded, especially when the US is at the same time speeding up military aid to Tel Aviv. (See this front page Saturday NYT article: U.S. Speeds Up Bomb Delivery for the Israelis)   Its only a guess, but I think the bullish hope for a quick resolution to this war is less likely, and it may go on for a few more weeks at least.  Indeed, the recent pair of bounces in the Tel Aviv Stock Exchange (TASE) may also just be oversold bounces.


We like to war game scenarios, and we consider this a possible outcome of the recent market action:  The markets have a number of false moves, before making another plunge late July/early August. This creates the deep oversold conditions mentioned above. At that point, we would look for a more advantageous entry.

However, our suspicions at present are that this next oversold move up could be the set up for the final denouement of the markets — a grand shorting opportunity, or for the less trading oriented investor, a move to cash. Despite all the sturm und drang you heard during the May sell off, we still have yet to experience a 10% correction on the Dow or SPX. Of course, the Nasdaq 100 is a total debacle, and I suspoect we could possibly see a revisit of the late 2002 lows on the index.

Note these scenarios are merely educated guesses, one theoretical path out of infinite possibilities. We use them to create mental maps of how markets might progress, and therefore they are subject to swift and merciles srevisions.  We consider them to be "strong opinions, weakly held."


One final note:   I am looking for feedback on what you want/need/expect from a service like ours. Look for a specific request (not quite a questionaire) later this week.

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  1. Scott Teresi commented on Jul 27

    I would very much like a page that lists all your past articles, one page per month or one page per year!

    I’ve just subscribed to your RSS feed a month ago, and the RSS feed of course doesn’t list many historical articles. I don’t want to have to manually page back to each article on your site, clicking a hundred times to get through a hundred articles, when I could just scan a list of their titles if possible. Do you make all your previous articles accessible by any reasonable means?

  2. Damon commented on Jul 29

    Grand Shorting Opportunity? – Distribution of the most serious and determined kind has sent money flowing out of the stock market at an alarming rate since May 11, 2006. Let’s get right down to the BEAR case. The 3 year old Bull move has not only lost steam but is breaking down completely here. They are taking out the leaders and shooting them with no remorse after decent earnings calls. NTRI RACK BIDU TIE and on and on. No new leadership is forming to fill in the gap. When your generals are DEAD the war is lost. The Artificial financial stimuli of ZERO interest rates since 2001 is now being removed and this is painful to the Bull case. Don’t fight the Fed…Fred! Words of Wisdom! The US is in a military quagmire in Iraq and is at WAR with Iran. We just let Iran do all the shooting…in Iraq at our troops. The Israel/Hezbollah/Hamas conflict is really a PROXY WAR between the US and Iran fought on the shores of Lebanon, Israel and Palestine. Expansion of this conflict to Syria and Iran proper is a very real RISK FACTOR for our beloved stock market. Earnings cycle has PEAKED in all industries save BIG OIL and Defense. Tech is getting decimated and is leading the downtrend here. -USA- is BANKRUPT and is being financed by the most generous Chinese and Japanese who wish for us to keep buying their products….a little bit longer. This may be reaching a head as Interest Rates continue to rise. Trillions of Paper Dollars may start looking for a home in GOLD and Oil. We have new Masters of the Dollar in charge here. Ben Bernanke and Hank Paulson will be tested severly before this downtrend in over. Severe market corrections cause stress to the financial system in many unforseen ways. Look out below! Probability of a CRASH is at least as high as 1987 but this can play out in a more orderly decline of some duration. SEVERE BEAR MARKET WARNING

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