My Thoughts II

[HenryTo]

Dear Subcribers,

I hope no one got caught shorting Google or other tech stocks recently. FWIW, I think there is still more upside to go in these stocks and in large cap growth as well - even though the market is getting overbought very quickly.

That being said, has anyone here read the latest work from Jeremy Siegel? This is a must-read, IMHO. One of the things that it mentions is that out of the top 20 performing companies on the S&P 500 (from March 1, 1957 - when the S&P 500 was first created) 17 of them were consumer products companies or big pharma companies. The proven strategy is to go for the "tried and true" with a great business model and a great brand name over the long run. Second lession: Valuation nearly always triumphs growth for retail investors who can't get in during the venture capital process:

http://www.amazon.com/exec/obidos/tg/detail/-/140008198X/qid=1116992870/sr=8-2/ref=pd_csp_2/103-4728423-2671018?v=glance&s=books&n=507846

Anyway, I digress. I am a proven worrier - and I am starting to get worried in that sentiment is getting bullish quite quickly. Indicators like the ARMS Index, the McClellan Oscillator, and Mark Hulbert's HSNSI, etc. If this is what I think it is, then this rally will probably have a few weeks to six weeks to go at the most, and then we go ahead and suffer another correction - right into the Fall that will take us to lows that we haven't seen before in the last 18 months. For now, we just sit and let the market tell us what to do.

Take care everyone,

Henry

[jchen0119]

Hi, Dubious and Henry:

FYI, I think the market is turning down again, based on the sentiment, breadth and momentum indicators cited in my last posting.

Regarding cash on the sidelines, that reminds me of the bear market in 2002. Every time when I wanted to sell my tech stock, my hope was kept alive by experts saying there is a lot of cash on the sidelines. The truth about bear markets is that people continue to sell into rallies to raise cash, and when the market finally hits the bottom, there is a mountain of cash on the sidelines, yet no one dares to use it except the most astutue investors/speculators (like Benjamin Graham). Basically, during a bear market, the cash on the sidelines just gets bigger and bigger, with more and more people chased out by the ruthlessness of the market decline.

Have a good weekend!

Jing

[Dubious]

I am sniffying a bounce on Monday.
Then going short for a while.

Keep up the great work Henry.

[HenryTo]

Nice to see you again here guys! Jing, keep up the great work. Appreciate your postings.

Dubious - haven't seen you in awhile. Nice to see you back.

I'm not too enthusiastic on the market at this point. The OECD is updating their leading indicators this weekend so I am going to update our global diffusion index using the latest data - not exactly sure how they will turn out but I am not being optimistic at this point. Sure, there is cash on the sidelines (along with a high short interest) but investors do not necessarily need to deploy them if they do not want to. It is now a guess game and my guess is that investors will not deploy if they continue to see a global economic slowdown.

Henry

[Dubious]

Jing,
Which way do you believe the market will turn?
Thank you!

[jchen0119]

Henry, thanks for your mid-week update. From a technical perspective, I can see several ominous signs:

1. VXN is testing its record low made at end of May:

http://stockcharts.com/def/servlet/SC.web?c=%24vxn

2. Nasdaq McClellan Oscillator has already diverged and plunged:

http://stockcharts.com/charts/indices/McSumNASD.html

3. Nasdaq Momentum has also diverged:

http://stockcharts.com/def/servlet/SC.web?c=$COMPQ,uu[m,a]daclyyay[pb50!b200][vc60][iUb5!La12,26,9]&pref=G

This could be a major turning point for the market. Let's see.

Jing

[HenryTo]

For readers who missed my thoughts last night, please the above post!

Just wanted to add something else this morning: GOOG is down about $4 as I am typing this while the Naz is up around 5 points. Yesterday, the DJIA finally took leadership away from the Naz - and so our DJIA Timing System will still remain 50% long for now. But don't be surprised if we switch to a neutral position by the end of this week or by early next week.

Best Wishes,

Henry

[HenryTo]

As my subscribers should know, I am a constant worrier. I worry about the declining competitiveness of Americans, the fact that our teachers have to buy insurance - along with new ethical and other challenges as we face the 21st century.

So what I am worrying now? The continuing decline in long bond yields is making me uneasy, as well as the decline in leading economic indicators all around the world. Through all this, the oil price has stayed high - along with Google and housing prices and homebuilding stocks, of course.

Ever since the late April bottom, the Dow Industrials has rallied approximately 500 points from the bottom. Not too shabby of a rally but given the oversold conditions present in two of our three sentiment indicators, the rally since then should've been much stronger. On the morning of May 5th, our DJIA Timing System became 100% long at 10,395 - on the premise that the environment was friendly to the bulls who wanted to go on the long side. We also recommended our investors to buy the large cap/growth and brand name stocks, and since then, they have outperformed as a group (although homebuilding - which we told our subscribers to avoid - have also done very well since then).

I think this latest rally is now getting old. Sure, some stocks will still continue to go up but the rally should be getting narrower and narrower going forward. It is, more or less, now a stock picker's game - which I feel most of us are not good at. As you can see from the tone of our commentary last weekend, I started getting uneasy. This morning's pop on the heels of a speech by Alan Greenspan was an opportunity to lighten our positions - a position where we can be more objective. This is a position that I very much like - since our positions are not high probability plays anymore and we can always deploy our excess cash to those positions again should the opportunity arise at some point down the road.

In fact, after our "sell signal" stocks such as EBAY and YHOO (which we have liked since May 4th) promptly did a downside reversal earlier this late morning and afternoon. This is an ominous sign.

For now, we will continue to reevaluate. I still think this rally have some ways to go but at this point, I want to be more cautious. This is more of a long-term view, but per the Dow Theory, we are still in a secular bear market - and during a secular bear market, valuations tend to swing from overvalued to undervalued - no matter how earnings do going forward (i.e. the stock market can go down even as earnings exceed expectations going forward - which, quite frankly, is not very likely).

Conclusion: I am in no way advocating our subscribers to "sell everything" - I just feel that we should be more cautious here given that the secondary trend has now turned murky. However, don't be surprised if we completely go to a cash position in our DJIA Timing System sometime in the next few weeks.

More details to follow in Thursday morning's commentary.

Have a good night and please email me or drop me a message if you have any ideas or if you have any questions, etc. Our subscribers has been instrumental over the last 12 months in keeping me on my toes.

Henry