The Real Long-Term Threats

Monday, March 27, 2006
For the past year, we’ve been warning you about the various factors that could drive stock prices down. Yet despite all our reservations, the market continues to trudge higher on the basis of strong technical underpinnings. The S&P 500 looks like the Little Engine That Could – slowly but surely pulling itself up the hill of all our worries.

Not since 2003 have stocks experienced a correction of any real magnitude (that is, more than 7%). Nor have they made any spectacular advances that carried them into overvalued and over vulnerable reaches either. We can’t complain; we’re making money. But we are a little surprised.

What’s more, we see nothing today that looks likely to alter that trend. Some potential dangers, yes. But nothing has actually reared its ugly head. The technical factors that have supported the market for the past twelve months are still firmly in place.

Bonds Smell Trouble

Monday, March 20, 2006

Each week, we try in these missives to report what’s happening, rather than what we think ought to happen, with perhaps a little discussion about what we expect will happen.

These days, we may have many trepidations about the future, yet we cannot deny that the short-term looks pretty good. Last week our short-term Master Key rose from moderately bullish at under 2 to pretty solidly bullish at 2.89.

As usual, the credit for this strength goes to low specialist shorting and strength in the broad market. Small and mid-cap stocks remain strong, and this also positively affected the MK. In such a situation, we won’t bet against the bull side.

The only case to be made for the bear camp at the moment is that this is an election year. And in mid-term election years, markets tend to lose strength between March and May. However, seasonal indicators like this are not 100% reliable, so we won’t give it much heed unless we see confirmation in our MK and other indicators.

Finally, A Word About Oil

Monday, March 13, 2006

This week the word from our technical indicators is pretty much the same as it’s been for some time, but a little bit weaker. Our Master Key remains stuck between 1 and 2 – bullish, but not very.

On the plus side, specialist shorting remains historically low, and the intermediate-term performance of small cap stocks remains positive.

On the other hand, last week a crack may have opened in this trend as smaller caps underperformed. Of course, one bad week does not make a bear market. Still, we will be watching the performance of the unweighted averages closely in the weeks ahead.

One of the most important developments lately has been falling bond prices. The 10-year treasury bonds have fallen from 109.6 at the start of this year to 106.9 last Friday. This is below the previous bottom set last November. We don’t think the bond market is on the verge of a big breakdown – at least not yet. However, we can’t rule out the possibility that prices will fall a little further in the near term. We may even see a 5% yield on the 10-year note, which would turn many investors pessimistic.

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