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Sunday, March 06, 2005
Market Recap
Good economic news, the Jobs Report on Friday was just what the market needed to break into new highs for the year. The Dow gained 107 points to close at a new 52 week high Friday at 10940. S&P made new highs with a gain of 12 points and a close of 1222. The NASDAQ followed with an 11 point gain but is still well below its highs for the year and still below its 50 SMA. Clearly, the NASDAQ is the laggard right now in this market. The Dow and S&P have broken through the double top formation that I have shown in the charts. These new highs were forecasted a couple weeks ago when I said that these double top formations are rarely broken through on the first attempt or two. These indices slammed into this resistance level and promptly turned back on the first couple of attempts, as expected. Friday was the third attempt and the good economic news propelled stock prices up through this prior resistance level, giving us a technical buy point. This area of prior resistance should now act as support unless, of course, this is a false breakout, which is always possible on the first break through.
Looking Ahead
We are in bull market territory on the S&P and Dow. I hate to be in cash when the market is making new highs, therefore we will be buying stocks next week but will be selective in trying to buy strong stocks as they pullback on low volume. Now, here is where our style has to change a little. In bull markets, stocks pullback and we have to expect it to happen, but they also bounce right back and make higher highs. Some of my charts tonight will reflect this action. If you are going to trade the market leaders, you have to have faith that you are right and give them a little room. This means that stops will have to be looser than they have been. Take a look at tonight's charts for example. All of these stocks are in leading sectors but they tend to have shakeouts before running to new highs.
If you are going to play the breakouts, you have to be a little more lenient with your stop loss limits. The less risky plays are buying these leaders when they pullback. The problem is, when these stocks are finished running, we will not know whether that first sell off is a shakeout or real distribution.
Hopefully, the volume will give us a clue, but if not, it will be hard to tell. If you buy a breakout and wait for the trend line to break down, you will have a hefty loss because the prices are far above the trend lines and, as a result, your stop loss order has to be very loose. You cannot have it both ways. If you want tight stops, the chances of having many small losses are good in this market right now, given the way that the shakeouts have been lately. If your more liberal with your stops, the chances of being stopped out are less, however if the stock falls enough, your loss will be much bigger than it normally would if you had a tighter stop. Here is where you have to decide what type of trader you are and stick to your guns.
No End in Site for Rising Oil Prices
Rising oil prices, rising interest rates, and the falling dollar are all factors that normally act as a deterrent to any advance in stock prices. However, the market has been remarkably resilient and seems to be oblivious to these factors. What does the stock market know that we do not? I do not like being all cash when markets are rising into new highs however, the market is once again acting illogical, and rising when the factors say that it should not be rising. Since we know that markets trade on forward projections of about 6 months, maybe the message is that the interest rates are through rising for awhile and maybe oil prices will settle down and stop advancing.
I still say that oil could reach $70 a barrel and, if that happens, I do not see how the stock market can advance. Of course this is what everyone one is going to think if oil continues to rise. The contrary view would be that the market will rise regardless. The bottom line is that the market trades are illogical to current news, but logical to future news. Six months from now, I bet we see interest rates flat. And oil prices? Well, maybe the market has just conceded to the fact that it is what it is, and it is not going back down. If oil is $55 a barrel now with the market going up, that tells me that oil could very well be $70 a barrel in 6 months from now. The market is considering oil cheap right now, making stocks look like a good investment.
When oil is $70 a barrel, maybe the stocks will slow down. Lets face it folks, the price of oil is not going back to $35 a barrel anytime soon and it may not. I think the stock market has realized this and has no choice but to move forward. Energy and oil stocks keep making new highs, which tell us that oil prices will not be going down. If oil is going to go down over the next 6 months, these stocks will forecast that ahead of time and start to roll over. Only then will we have a hint of the direction of oil prices.
The Leaders of the Next Market Move
I have added many leading stocks to the bulletin tonight. These stocks are the market leaders and will lead the pack in this next market move. Stocks always trade on forward projected earnings. The housing stocks have historically traded at PE's of less than 10. If the interest rates can stabilize and stay flat for awhile at these still historically low levels, I think that housing stocks will still have much more to run because of the continuing demand for housing. This will drive growth in earnings and subsequently drive up stock prices based on PE ratios. These are not growth stocks, hence the low PE's, however, there is demand for their products and services and, as long as the demand keeps increasing, there is no reason for this run to stop.
Keep in mind that when demand slows, these stocks will roll over and return to the historically low PE's of less than 10. The demand will drop only happen when the interest rates get so high that people can no longer afford houses. The stocks will forecast this ahead of time and start to sell off before we can see it coming or hear about it in the media. This is why we need to watch the trend lines. As soon as a lower low is in place, will be time to bail. We should ride these stocks up now and, as an added bonus, collect the nice dividend that they pay out.
The Shakeout
As I said in the paragraph above, tonight's theme on the charts is shakeouts. I am showing these strong stocks with examples of how shakeouts have occurred in them before bouncing right back to new highs. I have bought some of these stocks but was shaken out with my tight stop only to have them reach new highs. Stops are a necessary evil but, as I have stated before, they can prevent you from participating in some of the most parabolic price moves.
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