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Great Expectations

Posted By Barry Ritholtz On January 15, 2004 @ 3:07 pm In Finance | Comments Disabled

Despite the blowout numbers from Intel, Apple, IBM and Yahoo – and good numbers to come from Merrill Lynch – there is still plenty red on the very mixed screens today. Expectations have been ratcheted up to high levels. Even firms that hit targets may be subject to some long overdue profit taking. There’s simply no room for anything short of perfection.

We are now in a classic “sell the news” mode.

Meanwhile, the past few weeks have seen a spurt of seasonal buying, taking markets even higher into overbought territory. Pension funds have made early purchases, while some of the 2003 bonus money is coming into equities. Seasonal factors are playing out according to script. And while there is still plenty of liquidity and cash on the sidelines, we are left wondering how far traders are willing to chase equities.

Regardless of the extended state of the markets, buy-side trading behavior still reveals a strong appetite for stocks. This combination of overbought equities with a priced to perfection earnings season may possibly present the first real test of this nine month old cyclical Bull market – especially if we see any sort of satiation on the part of the large Pension players.

While the market internals still remain healthy, we note several very early warning signs have appeared on the horizon. Consider these to be distant signals of trouble down the road:

· Split Stocks Rocket Higher: When companies like Taser International (TASR) pop 14 points in a day on a 3 for 1 stock split announcement, we suspect that the speculative side of the market has shifted into 4th gear. Yesterday’s close was 115.54; TASR traded around $12 six months ago (7/2003);

· Profitless Issues Lead Nasdaq: Looking at today’s gainers on the OTC, we note that 8 out of the 10 “Most up percentage” are companies without profits. On NYSE, its 5 out of 10 lead the market. This speculative group has been the Nasdaq leadership for quite some time now;

· Volatility Has Dropped Back Towards Lows: We’ve heard anecdotal evidence of volatility hedge funds either “cutting their exposure significantly” or actually “shutting their doors [1].” Key market reversals are often preceded by random big player “blow ups.”

Whether the dip buyers prevent real damage from occurring, or a real reversal of momentum occurs will be the key to next few weeks.


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[1] shutting their doors: http://www.minyanville.com/gazette/newsviews/?id=3336

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