Time for a Pullback

One of the fascinating things about the equity markets is
how so many different methodologies very often reach the similar conclusions.
After a significant run up from the pre-market London bombing related panic,
the markets now appear overbought and in need of some consolidation.

This is based not on any specific market reading, but rather
on a variety of different gauges:

• The last few days of the advance has come on decreasing
volume, never a good sign for the short term;

• The length of the recent move suggest it is getting tired
and due for a rest (See Jeff Saut’s “day count”);

Dick Arms notes his Trin (or Arms) Index for both the NYSE
and Nasdaq are in the overbought area;

• Cycle Forecaster Charles Nenner observes that cycle work
suggests softness until the end of July;

• Kevin Lane of Technimentals notes that markets are near
their upper ranges with resistance just overhead;

Bearish sentiment is at an
extremely low 14%;

• VIX at a 9 1/2 year low;

Carl Swenlin nearby chart reveals excessive bullishness
(UPDATED: JULY 18, 2005 2:35pm — Decision point discovered their chart contained a a bad data point; DIsregard this bullet point)

Given these 7 6 7 factors, coming on top of the post-London 7/7
run, the markets are overdue for a pause.

The reasons these different approaches on occasion yield
similar perspectives is that they are all based on the same data sources. After
all, Market action primarily consists of price, volume and time. With the
exception of sentiment surveys, these other approaches rely primarily on these
3 key components.

Given the lack of significant economic news this week – and
the tendency of Greenspan’s Congressional testimony to grind trade to a slow
drip – the market will be looking towards earnings. So far, the impact has been
company specific. That leaves the aforementioned sentiment as well as
technicals to be the key drivers this week.

Longer term, corporate balance sheets are clean and cash
rich, the consumer is still carrying the entire economic load. Unless and until
we see real hiring and CapEx spending by companies, the jury remains out on the
expansion continuing very deep into 2006.

Our investing posture is as follows:

Short term, we expect
some weakness, as markets work off their overbought condition.

Intermediately,
we believe the rally can continue into the mid-Fourth Quarter, and advise using
the short-term weakness to add to long positions.

Longer term
, we are less
sanguine about 2006 than our more Bullish peers. We suspect the market might be
topping out around November.

Plan accordingly.

Category: Investing, Psychology, Technical Analysis

Chart of the Week: Sentiment Extremes vs S&P

Category: Investing, Psychology, Trading

NABE Knaves Gnaw News

Category: Economy

I’m not Dead Yet!

Category: Politics

Sentiment Suggests a Pullback

Category: Investing, Markets, Psychology

Sunday Linkfests

Category: Economy, Media, Television

Poker for Traders

Category: Psychology, Trading

Oil & Market Correlation, Thunderhorse

Category: Commodities

Spammers terminated With Extreme Prejudice

Category: Weblogs

New Column up at Real Money (07/15/05)

Category: Economy, Investing, Markets, Podcast, Psychology