Consolidation for upside breakout

Sorry to be late; the blog did not like my internet settings this AM

We are starting to see less short selling which is a sign that the hedge funds are moving to a lower proportion of shorted stocks.

One of the oldest and easiest-to-interpret indicators in the stock market is market breadth often called the advance/decline line. It measures how broad or how narrow a rally or a decline is. It works by measuring market breadth versus the underlying market price index. So for the S&P 500 price index, we compare the cumulative advance-decline line to the S&P 500. If we look at a long-term chart of the two together, we see that in October 2007, there was a negative divergence where the S&P price index made a higher high in August, but the cumulative advance-decline line (breadth) made a lower high which is a sign of weakness just before the tremendous market drop.

Since that time, we have been in a bear market, and S&P breadth index has basically kept pace with the S&P price index, as they rallied together and dropped together. However, since the November 20 low in the S&P 500, there has been a slight change in this pattern. If we look at the short-term chart of this indicator and the S&P together we now find that during the decline of the week ending December 6, breadth was outperforming the index another indication that the price was bottoming out. The S&P price index has since just caught up with breadth, but breadth have been holding steady, keeping pace with it. This is one of the positive signs we’ve seen in the market since it made the highs of October 2007.

Our "Respiral" method which combines Parabolic SAR and MACD indices to call windows of buying and selling opportunities got us in cherry picking between Nov 6 and Dec 5, 2008.

Out June20-Nov 2, 2007
In Feb 27-April 4, 2008
Out May 28--June 12, 2008
In Nov 6-Dec 5, 2008


Asian (excluding Japan) ETFs, and high dividend return stocks with low debt and high cash positions are what we consider to be the safer investments to be in at this time.

The FED is doing everything possible to get people out of cash since hoarding cash (especially by banks) is what has caused the velocity of money to drop close to zero. The FED knows that it does not matter how much credit or cash they make available because when the velocity of money is zero or negative investment and consumer spending is zero.

Money in circulation = M (money available) X V (the velocity of money).

So the FED is now working on getting the velocity of money into positive territory be attacking the value of cash by dropping inflation adjusted interest rates into negative territory.

As stated above, the "Breadth" indicator is a measure of how broad or narrow a rally is, and this recent action suggests that the rally is broadening, which tends to be bullish for the market. And the FED is trying to put a negative interest penalty on people holding cash so that they buy now and stabilize real estate and equities. But the two most resent SEC chairmen have been greedy and incompetent and have allowed Madoff crooks and short seller market manipulators to fleece the pensions of honest Americans.

Let's face it, President Bush lacked the mental capacity or inclination to understand what was going on under the nose of his administration. President Bush lacked the kind of ethical standards necessary to declare that corporate, real estate and Wall Street greed and dishonesty was a moral hazard. President elect Obama promises to do better and Americans want to give Obama the chance now. And so far Obama has been acting like a capitalist and an evangelical so he may work out as well as President Clinton did and ignore socialist Soros and the far left.

On a much shorter-term basis, the market may be overbought. Typically, such an overbought reading will lead to a pullback followed by a renewed rally. If this market hadn’t been so volatile of late, we’d expect a pullback, after a 20% rise, along the lines of 3% to 10%. However, lately this market has been volatile and often in the course of a few days it can correct completely. Presently the market is up about 0.5% this week with one day to go.

Asia is mixed but down overall about 0.5% today. Europe is mixed and down about 0.75% at this time. The American market futures are mixed and indicate a slightly higher open for the market today. But options are coming into play today and it could swing more positive today.

Based on the improvement in breadth as discussed above, and this overbought situation we believe a pull back at this time would be smaller like March 2007 than December 2007 overbought situation. We do not chase rallies when we are this overbought. Let the short sellers get deeper into margin debt now so that we can look forward to an even bigger rally thereafter followed by a short-squeeze of historic proportions. We will assess the health of the market on a daily basis.