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Sunday, November 20, 2005
Market Recap
The market keeps moving higher with steady gains and continued strength as both the Nasdaq and the S&P made new four and a half year highs on Friday. The Dow gained 46 points Friday with the Nasdaq gaining 6 points and the S&P up 5 points. For the week, the Dow gained 80 points and closed at 10766, while the Nasdaq advanced 24 points and close at 2227. The S&P added 13 points on the week and closed at 1248.
It was a very good week for our STHQ portfolio. We took many new long positions this week and all but one of these new positions look super. Due to the continued strength in the market this week, we felt we had to get 100% long as to not miss a possible Holiday run-up.
We also continue to stay away from adding any short positions, given how impressive the recent uptrend in this market has been. Even though the market is over bought, it still does not pay to try and pick a top to short so we will stay with the trend until the trend changes.
Bullish For Now
The recent action in the stock market has been extremely bullish. We say this because stocks have managed to trade sideways instead of selling off even though they have been short term overbought. When this happens it is very bullish because it forms a nice base from which to break out again to the upside once this overbought condition works its way out. Any time a market is overbought and does not go down it is a sign of strength. It is a sign of no sellers and a market that wants to move higher. It should also be noted that the recent rally has been led by growth sectors such as Internet and semiconductors. Financial, Retail and Transports have also been strong. This broad based rally is a very bullish sign for the market and when growth stocks start to out perform the market like the internets have been doing lately, it is a great sign for the overall economy.
We mentioned a couple weeks ago that when the Dow Jones Transportation index does well, this is usually a leading indicator for the stock market and the economy. Since then, the TRAN has broken out into new 52 week highs again and along with that, we have seen the overall market and many groups become very strong.
Yield Curve Bearish
The above paragraphs present a very bullish picture. However, we need to be aware of a very important bearish signal. I'm not trying to spoil the party of the above bullish outlook but we do have to keep the yield curve in mind. Short-term yields (Fed funds rate) are rising while long-term yields are falling. The 10 year treasury bonds are yielding 4.60% as of Friday. This is only .60% above the Fed funds rate of 4.00%. It amazes me how the financial stocks can be doing so well at this time with the yield differential so low. Banks make money on the spread between these two rates. If the rates become flat, then banks cannot make money. If banks do not make money, then the stocks should not be going up. If long term rates keep falling and the Fed keeps raising short term rates, the yield curve will go negative (become inverted).
Throughout the history of the stock market, when this inverted yield curve has happened, the stock market has gone into Bear mode and the Economy has gone into recession. The stock market is red hot right now and you would never know by the way stocks are acting that the yield curve was this flat. It sort of gives us a false sense of security about the current bull market we are seeing. Nevertheless, we will continue to be long this market while stocks are on the rise but we want everyone to be aware of the potential yield curve problem we may face if the Fed continues with rate hikes in 2006. If it should occur it will undoubtedly result in negative consequences for stocks.
Important Announcement
There will be no bulletin on Wednesday and Thursday nights this week because of the Thanksgiving Holiday on Thursday and only a half day of trading on Friday. Alan and I will NOT be available for trading on Friday due to the fact that this is a very light volume trading day and we both have plans for the long weekend. Tuesday evening will be the last Bulletin and Commentary for the week. We will resume our regular schedule of updates on Sunday Nov 27th. Enjoy the long Holiday weekend everyone and take advantage of this nice break.
Stockcharts Listing
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STHQ Chart Index
If you go to the chart index in the left side menu, you can review and study charts we have annotated for each stock listed in the past.
Earnings Calendar
We have added the earnings link for each stock on the bulletin. To access the link for earnings you can either use this link below or click the link on the bulletin for the corresponding ticker. Click the online bulletin in the left side menu for access to the earning calendar for each stock listed. It is not recommended to hold a position through earnings. You can always buy the stock back after the dust settles.
http://www.earnings.com
For New Members:
Please take a moment to read the "How To Use The Bulletin" link at the bottom of the Bulletin page on the website. It is critical you understand how to use this trading tool before trying to trade the stocks mentioned. The effectiveness of your trades will diminish if you do not completely understand how the information is presented.
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