Friday’s opening pop and reversal suggests that the market may be finally starting to get tired. Some consolidation is likely before the next major leg up. This has been seen in the overbought condition of the market, and the excessively bullish sentiment indicators: The put/call ratio, Arms index, 52 week high/lows (see chart at right) and advance/decline line all are reading way overbought, while both the AAII survey and the II numbers reveals far too many Bulls and too few Bears for comfort.
The high volume, intraday reversal suggests profit taking by the bulls; Keep in my mind that the Quarter is ending in a few short weeks, and there is huge pressure on the under invested fund managers to keep up with the indices.
Meanwhile, on the short side, there is a lot of hoping and praying for a reversal, if only to salvage the Quarter and earn their bonuses or incentive pay.
Whether the Bulls or the Bears blink first is unknown, but it’s important to understand which sector groups have been rising, and why. It’s been the highest Beta, most heavily shorted NDX stocks have been leading the charge up. Notably, Biotechs, Internets, Telecoms, Software and Semis have been on their tear, as shorts cover and fund managers attempt to “catch up” to the indices via the highest Beta equities they can find.
On the other side of the ledger, dividend payers have been feeling the love from the fund community: Utilities, Financials, Oil Service, Retailers and Industrials have been winning new fans from various money managers. Credit the new tax laws for the newfound affection for dividend paying companies; Expect this to continue to until interests rates tick higher . . . Something we don’t expect to happen until the economy appears much healthier, or the 2004 elections happen – whichever comes first.
So the Quick(high Beta, heavily shorted issues) and the Dead (previously unloved dividend stocks) are what’s been leading the market higher; Expect this pattern to continue at least until this Quarter ends. Healthy dips are likely to be shallow and therefore buyable, but note the following caveat: Pre-announcements will add to the volatility, and should be some considered prior to making purchases.
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-John Fitzgerald Kennedy, 1917 – 1963
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