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Wednesday, July 28, 2004
Good evening friends,
Market Recap
It was a mixed market today with the Dow closing up +33 points and the NASDAQ down -10 points. It looked this morning as though there would not be a follow through of yesterday's rally and short positions were looking good, but the buying started in the afternoon sending the Dow soaring up over 100 points from the lows of the day. This index is now poised to probably make more gains tomorrow. It does however, have resistance 90 points ahead at the 200 SMA around 10200. It is at this level we will most likely see some selling take place and the resumption of the down trend. After all, stocks and indexes do not go straight down, so these minor bounces back to resistance are common. It is just the opposite in a bull market when stocks and indexes stop to rest, consolidate, and have minor pullbacks to shake out the weak as it moves in an upward trend.
Consumer Confidence
Yesterday's rally was the first time in a week that advancing stocks outnumbered decliners by a wide margin. For many weeks the number of decliners has been crushing advancers. Better than expected June new home sales coupled with the July consumer confidence number of 106.1 contributed to the rally yesterday. This was the highest the consumer confidence has been since June of 2002. The analysts were looking for 102 so this number was a nice surprise and was no doubt a major factor for the rally.
The economy has been moving along much more so than the analysts have been saying. All those stocks getting hammered down on very solid earnings and forecasts, and all the negativity they have been spouting about how bad things are, may be starting to be brushed aside by the markets. What we really need to hear is some very solid job market numbers. Consumer confidence is up, but the job market needs to be growing as well to truly reflect a growing economy.
Distribution
We also need to see a very strong surge in volume in the broad markets. This means a high volume of institutional buying needs to come back into the markets. This is the volume that we have been missing over the last few months. Mutual funds and big institutions have been sitting on cash and have been in no hurry to put new money to work. As a result, we have not had the volume we need to push stocks up. Most of the volume has been to the down side, and this was probably due to the big boys easing up on positions and moving into some cash, this is called “distribution” as opposed to “accumulation”.
The S&P 500 Index has been on a losing streak for six consecutive weeks now. I have a chart of this index tonight. This index is mainly moved by big mutual fund investors so this action gives a hint whether or not they are buying.
Patience
Until we see more leadership in the market we should take our time and observe the market's ability to sustain and confirm any advance with a follow through day of gains on higher volume. It is important to watch for signs that institutional investors are showing confidence and conviction before we rush in on the long side of things. The whole purpose behind the cash preservation philosophy is to be ready to act when the market is ready to move up. By preserving our cash and trading wisely, we will ensure our readiness when the time comes.
Still Short
For now, we will keep shorting stocks as they approach resistance. Even though we know the picture is a bit brighter, we also know that without volume there is no chance for a sustained market rally. Once the volume comes back, we will know to start covering some of our short positions and looking for more opportunities on the long side.
Closed Trade Record
Our closed trade record now stands at 25% YTD. Admittedly, this is not our best performance but it is very good compared to the market this year. The NASDAQ is down about -7% in the same time frame. This means that we have out performed the index by 32%. This has been a very tough market to trade and as Yogi would say “if you are doing well right now, you are doing well”. We are on a pace to make almost 50% this year, and I am confident if market conditions improve we can make much more that that. We will likely not attain our goal of 300% per year this year, but an outside chance at 100% is still possible under more favorable conditions. The markets will improve; it is only a matter of time.
OTC BB Watch List
- none
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