RSS feedThe rally in US equities the last few weeks has finally resulted in breakouts to all time highs in the Dow and S&P 500. The NASDAQ also sits at an 7-year high. While the bullrush in the Dow (and large caps in general) seems to have calmed down a bit, the highs in the S&P and the NASDAQ today look eminently bullish. And, as we all know, typically speaking NASDAQ leads the markets.
Because these are so fun to look at, I’ll post each of the price graphs.
As you can see, it seems that the Dow has found a little bit of resistance as it has crossed over the 14000 line once again and begins to tread in new territory. But, the NASDAQ, home to more of the growthy stocks as well as the technology sector, seems has had no trouble, easily ascending to its new high. I would prefer higher volume buying, but average volume is bullish enough.
More importantly, this Monday marked a including bad news from Citi and UBS and markedly lower profits. Despite this, we saw all three indexes close higher. As the week continued, we did not see increased volatility into today’s jobs report despite some early private sector reports that would have caused near panic a month ago. It seems that the repricing of risk has worked its way through in the equity markets and we’re back to more controlled and rational buying and selling. Hopefully, you haven’t missed the current rally, but for those of you on the sidelines, I believe there will be room yet. The economy seems to have its feet back on the ground and, outside of continued softness in housing, the sky may not be falling after all.
Issues over the horizon include where the Fed goes with its monetary policy now. Will inflation creep back into the forefront of our economic view? What about $80/barrel oil? Can it possibly stay this high? Can we maintain sub $3/gallon gas prices with oil this expensive? Yea, there are questions. And, quality and industry leadership is still the key to making good decisions over the next year plus. But, for those looking to trade a rally, your time is now.
October 6th, 2007 at 7:57 pm
One economic indicator was enough to change the mood on the street from recession to record highs. Amazing!
Outside of the issues you mention in your post I would also like to point out the following challenges facing the US economy
- Housing woes keep getting worse. Read how bad it is in the current issue of Business Week.
- Earnings growth is slowing and as profits reduce so will valuations.
- Credit issues are yet to be worked out and it will be a while before the write-offs, LBO deals and liquidity issues are resolved.
I agree with you that this market presents some trading opportunities. In a recent post I was contemplating what kind of shorting strategy to use. A correction seems imminent.
October 7th, 2007 at 9:51 am
I wouldn’t say it was just one economic indicator which drove the market back to its record highs. I would say it was likely whole generality of September with the rate cut, the lack of any more powerfully bad news, and continued strength in global growth. Truth be told, I think earnings over the last quarter were not as bad as the news make it appear. I read a few articles saying that over 60% of S&P stocks had earnings beats or something like that. Expectations are very high and there are many stocks trading at higher multiples than they likely should so a correction due to the repricing of risk was imminent and I think that’s kind of what we just had.
I agree that we once again had a very quick correction which leaves me a bit uneasy. In February, the market dropped about 5% and rebounded within weeks. This time, we had a psychologically significant 10% retracement and had some help from the Fed to rebound within two months. I don’t know what will bring about the next correction, but I would agree that the next one could be the scary type that takes a bit longer to come out of. But, I see at least a half year before this catches up with us. Long story short, I don’t know that I would necessarily get to shorting just yet.
October 7th, 2007 at 9:08 pm
Dan:
The fact that something is amiss is obvious. Red flags are going up and many are scratching their heads about the bullishness of the markets.
As a trader I have some bullish bets but would like to entertain the option of hedging my portfolio against a correction.
Agree that the next correction could be nasty. Lets see how the Q3/Q4 earnings turn out - that would help set market direction.
Recommend the article “Some Warning Flags Fly …(WSJ)”
-Mark