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Frothy!

Posted By Barry Ritholtz On May 12, 2003 @ 11:38 am In Finance | Comments Disabled

As this leg of the rally starts to run away, concerns are popping up. None of these issues changes our underlying perspective–the market is in a cyclical bull mode and may end up 15–20% higher before significantly reversing. Regardless, signs of a near term pullback are appearing, and they are worth reviewing:

Too Many Bulls: The nearly 56% Bulls (24.4% Bears) in the most recent sentiment survey by Individual Investor is an initial cause for concern. People get Bullish after they buy stocks, not before (that’s just Human Nature).

Overbought: By most measures, the markets are have come pretty far pretty fast. The measure of OB/OS is strictly a function of price and time; An overbought condition can be alleviated by either a pullback (price), or by treading water for a while (time). If the market marks time (instead of pulling back), its somewhat bullish.

Speculation remains a concern as many third tier issues and high priced dotcoms maintain their aggressive chart patterns. Hints at days of old, and that’s bearish. Even DELL is up nearly 50% since February 2002 (3 months ago).

European Bourses look anemic and on the verge of rolling over. The German Dax was down nearly 3%, while the (non-Euro denominated) FTSE turned positive. The weak dollar/strong Euro makes goods from Europe more expensive here; Europe is already in a near recession, and without US consumers, the situation there could worsen.

Equity Put Call Ratio has moved up smartly, without a commensurate move in the VIX. This suggests that portfolio managers are buying cheap insurance on their long positions. If the VIX had moved up sharply along with the Put/Call ratio, that would indicate a “Wall of Worry” is forming; Without that concern, the P/C ratio remains Bearish.

We expect a shallow, buyable pullback over the next week.

Random Items

This Time, Bonds and Stocks May Prosper Together [1]

STREET LAYOFFS HIT NEW RECORD [2]

Best Compensated CFOs [3]

Why the Market’s Winners Tend to Keep Winning [4]

The Lost Beatle Album [5]

Newer, Smaller, Faster, and Not in Stores Now [6]

Quote: “It is difficult to produce a television documentary that is both incisive and probing when every twelve minutes one is interrupted by twelve dancing rabbits singing about toilet paper.”
-Rod Serling [7] , 1924 – 1975


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2003/05/frothy/

URLs in this post:

[1] This Time, Bonds and Stocks May Prosper Together : http://www.nytimes.com/2003/05/11/business/yourmoney/11PORT.html

[2] STREET LAYOFFS HIT NEW RECORD : http://www.nypost.com/business/75046.htm

[3] Best Compensated CFOs: http://www.forbes.com/home/2003/05/08/cx_aw_0508cfointro.html

[4] Why the Market’s Winners Tend to Keep Winning: http://www.nytimes.com/2003/05/04/business/yourmoney/04STRA.html

[5] The Lost Beatle Album: http://www.rollingstone.com/features/coverstory/featuregen.asp?pid=1529

[6] Newer, Smaller, Faster, and Not in Stores Now: http://www.nytimes.com/2003/05/08/technology/circuits/08wait.html?ex=1053442

[7] Rod Serling: http://www.scifi.com/twilightzone/serling/

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