Friday, April 18, 2008

Bear Eggs

Actually, it is egg on the faces of the bears. And EVERYONE seems to be talking about the Dow Theory buy signal. I'll add that EVERYONE knows the Dow broke out from its 2008 trading range.

As I and many others say, what everyone knows is not worth knowing. What a chance for a colossal fake out! What is the weekend press going to say? Buy! CNBC sure featured it Friday afternoon.

Carl Swenlin of observed that both Wednesday and Friday the market had "suspicious" gaps up at the open, supposedly as hinge buys came into the futures market under the cover of any convenient news story (Citi didn't collapse as much as we thought Yay!). Bears were forced to cover and retail fell for the chase. Yet volume was just fair.

One more thing - did it bother anyone that the solar stocks - MARKET LEADERS - were beaten up with both fists? Market leaders are supposed to lead and when they don't the market falls. Yes, things could have rotated into another group but that's not really how that happens. Leader 1 slows down and leader 2 accelerates until the switch places. Solars bonked! And tech took over? C'mon. Tech was up poo poo creek until Intel. You don't go from basement to penthouse in a day.

Rant over. Quick Takes readers, more in the next edition.

A good weekend to all!


adh1 said...

I thought your last article in Barron's on cycles was very timely,especially as we all try to rationalize Friday's rally ("Bear Eggs" helps, too). As you have noted many times, bear market rallies can exhibit extremely powerful upside price action. The cycle work you displayed helps keep one grounded and focused as many proclaim the "bottom" is in, contrary to all primary market indicators.

I am too young to remember the market's critical path through 1973 but the parallels (to me at least)are worth considering. In July of '73 (Dow:870)there was a low not much different than the January low of '08 and when the Dow hit 851 in August of '73, it appeared a "bottom" had been formed: the Dow then took off on a 16 percent gain up to 987, a secondary correction move similar to what we are experiencing in today's market as the Dow is up about 9.5 percent. Given the 3 month base building (Jan-Mar) and a break to the upside, it appears this rally has a ways to go which may bring it close to an equal percentage gain as witnessed in the '73 secondary correction rally?

You know the rest of the story: the Dow subsequently put in its low close around 788 in December of '73. This seems to be the pattern developing today, with similar facts and circumstances, and coincides with the framework you depicted in your Barron's article "timing market tops and bottoms". Continuation of an unpopular war, high oil prices, worries about rising taxes,inflation,eroding corporate profits and chronic economic underperformance, I would imagine, may all help push the Dow to retest or take out the March '08 closing lows? So while most of the mainstream financial press is proclaimed the "bottom" to be in, I'm looking for short-term "top" to ride a naked short down in the second half of the year.

Cycles are not in my "body of knowledge" (history and statistics by training) but I would certainly like to begin to get up the curve (no pun intended). I went to the website you suggested in your previous blog but the wealth of information was a bit overwhelming. Can you suggest one or two of your favorite article/books to begin understanding Cycles 101?

Sherri said...

Hi Michael, I love reading your columns and something just caught my eye. You mentioned the clobbering that solars got last week. I would like to know if there is a composite chart or etf for solars in general to review? What are your thought on the group? They sure got wacked last week and the cultrip that started it, SPWR now seems to be hanging in there. Your thoughts on this incident and the group in general?
Thanks much,

Quick Takes Pro said...

adh1, I agree with the 1970s analogy and have written about it in the past. There was even a case back then that the market led into the resignation of the VP and then the President but we'll likely not see that happen.

I don't have a favorite book on cycles to recommend but there are many sources from which to choose. If you do a little pre-screening at your favorite traders' bookseller website, I can probably give you a thumbs up on a few authors.

Quick Takes Pro said...

sherri, I don't know what started the solar stock bonk last week but they were in rather steep rallies at the time just ready for some panic profit taking. I would not write them off just yet and actually have one on tap for the newsletter tomorrow. Sorry, can't make recommendations here.

I don't know of a readily available index on solar power stocks and did not see any ETFs (although I am sure someone will crate one to market the top - lol!).

Many software packages can create indices with components of your choosing and some have their own indices (HGSI comes to mind).

Sorry not to have a good answer on that one.

Anonymous said...

Adh1, your comments are insightful. To this point the 73 market pattern has great similarity to today's market. I would not be surprised to see the retest next month, but in 73 the Fed Funds rates were rising immediately driving the yield curve negative. Today's Fed is 6+ months late in that process, and will keep an increasing yield curve for the banks. Thus the equity market pattern from here is likely slower more volitile decline as the banks repair their balance sheets and choke the economy.