No Worries

There's nothing on the horizon to worry about, Helene Meisler says. But since no market can be that accommodating, look for a correction soon.
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As the month comes to a close and we face the end of another earnings season, there seems to be an air of bullishness around. I think I heard that about two-thirds of the

S&P 500

companies had reported their earnings, and of those, about two-thirds had beaten expectations. Sounds good, doesn't it?

It now seems as though

Compaq's

(CPQ)

horrible warning of a few weeks ago was a blip and a very company-specific one at that. Last week's reports from

Gateway

(GTW)

and

IBM

(IBM) - Get Report

saw to that. And now the news is filled with reports that the global financial crisis is now over. Even

George Soros

said so this past weekend.

In addition to all that good news, the markets are awash with cash. It seems as though April is on course to show the largest inflow of money into equity funds. There's nothing on the horizon to worry about. The world seems to be a perfect place.

This has shown up in the demand for stocks. It's most evident in the specialist short ratio. Typically, as a stock moves higher, there are those holders which are willing to sell. When the longs are done selling, those doubters take over and will short them stock. Eventually, even the shorts get frustrated and stop their selling, too. This is where the specialist comes in. It's his job to keep a fair and orderly market, and so in this case, he must be the seller of last resort.

While he may not sell you stock at the price you want or even the quantity you'd like, he is there to make a sale to keep the market going. The specialist will typically have an inventory of stock he sells first. When his inventory is depleted, he begins shorting the stock to meet the demand. In the past, when the specialist short ratio gets to an extreme, we are fairly close to a turn in the market.

When the market is declining and there is little demand for stocks, the specialist must also be the buyer of last resort. Therefore, when the ratio is low, we begin to suspect a turn to the upside is near. That means investors have dumped so much stock that the market cannot absorb it all and the specialist must begin to step in and buy. You can see on the chart that by late August through early September, there were so few buyers in the market that the specialist short ratio shrunk to a very low number, 37%. While the averages did not make their lows until early October, most stocks made their lows in late August (when we saw the peak reading of 1,184 stocks at new lows).

On the flip side, a reading over 50% is typically an early warning that we are nearing a short-term peak in the market. In late October, just one week before the advance/decline line made its high and the market went into a four-week correction, we saw readings of 53%. Then, in the last week of December, we had a reading of 52%. One week later, the market made its high and we went into a prolonged correction until the recent rally got underway. And now, here we are in mid-April with a reading of 51%. This is just another item to add to the thesis that we can expect a market correction in the very near future.

(For those who think this is just a

NYSE

phenomenon, think again. This indicator tracks very closely to how short the member firms are -- which is currently at an equally high reading of 61% -- and that's all stocks, including

Nasdaq

ones.)

Now, in terms of timing, it's hard to say. We are currently overbought, but I expect that a rally with as much momentum as we've had will not correct just because we're overbought. This indicator should back off some more and then come on again to a lower high before a correction sets in. (See a full discussion of this indicator in a previous

column of mine.)

Individual stocks are another story, however. The banks do not act well despite the fact that everything is hunky-dory. The NYSE finance index has yet to make a new high. In addition to the banks, there are some other big-cap names which are not acting well.

Take a look at

Home Depot

(HD) - Get Report

. Since the October low, this stock has continuously made higher highs and higher lows. However, most recently it did something it hadn't done before: It made a lower low. See the most recent fall from a new high? It broke the previous low at 60 and went to 58. Just a minor infraction, really. But now it rallied and failed; it didn't get to a new high before it turned back down. The stock can still be OK as long as it doesn't break last week's low of 58. But if it does, it will break an uptrend line and a previous low. Two big no-no's.

Watch out as well for

Merrill Lynch

(MER)

. It was not able to surpass its high from last summer on its recent run to par and has now sold off back to the mid-80s, slipping just past the 85 low it made in March. From there, it's rallied and turned down again.

McDonald's

(MCD) - Get Report

continues to trade poorly as well.

The positive side has fewer names each day.

Hewlett-Packard

(HWP)

is still a favorite in the tech sector.

Alcoa

(AA) - Get Report

,

AlliedSignal

(ALD)

and

Caterpillar

(CAT) - Get Report

are still favorite cyclicals.

Are stocks awful? No. But the combination of the overbought reading and the too-bullish sentiment readings has me looking for a correction soon and a better buying opportunity after that. There is too much good news and not enough to worry about. I've never known the market to be that accommodating.

Helene Meisler, based in Singapore, writes a technical analysis column on the U.S. equity markets on Tuesdays and Fridays, and updates her charts daily on TheStreet.com. Meisler trained at several Wall Street firms, including Goldman Sachs and Cowen, and has worked with the equity trading department at Cargill. At time of publication, she was long Hewlett-Packard, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback at

KPMHSM@aol.com.