This column was originally published on RealMoney on Nov. 2 at 11:35 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.
Sept. 9, I outlined why it would take a few weeks for the enormity of damage from Hurricane Katrina to sink in. Among other disasters, I compared the hurricane to the impact of the 1973 oil embargo and the 1906 San Francisco earthquake: In each of those examples, it took investors a period of weeks to wrap their heads around the economic harm that had been wrought.
It turns out that this disaster was no different. Market participants' belated acknowledgement of the storm's massive impact led to the historical pattern repeating: Markets shook off the storm, rallying for few weeks, before pulling back. They then rallied one last time before calling in sick for the month of October.
And oh, how sickly they were. The action in the first two weeks of that frightful month did significant technical damage to equity markets as trend lines cracked, breadth decayed and a variety of other indicators went from bad to worse. The damage to investor sentiment was just as bad.
It has taken some time to repair the technicals as well as investors' psyches. Some of the more astute among you will observe that these two things are often one and the same. By repairing one, you often repair the other.
Since then, the market's tone has becoming increasingly firmer. The many technical, internal and seasonal factors I track suggest that a modest, short-term, "tradeable" bottom is being formed.
To anticipate trading over shorter periods, I rely on both the market's internal quantitative data as well as other technical signals. These have been modestly encouraging, with only a few exceptions -- including weak market breadth, which
Helene Meisler has examined in detail.
This buying juncture is not ideal. Although it hasn't fully gelled yet, I am becoming increasingly more comfortable shifting toward a bullish posture, for however brief a time period that may be.
I would become even more aggressive if not for several fundamental factors that counterbalance these quantitative improvements. These include more restrictive monetary policy and increasing fiscal budgetary pressures, which suggests a rising likelihood of either higher taxes or less deficit spending, or both.
Despite this not-quite-perfect floor, most of the elements are slowly coming together to support at least a modest year-end rally. My analysis suggests that traders and index buyers can get long over the next few weeks, with a projected top in mid-December.
What's the basis for this? My key positive factors include:
Nasdaq short interest: This hit a record high last week. Historically, extremes in shorting -- most especially when done by odd-lotters -- occur fairly close to intermediate bottoms.
NYSE thrust sessions: A thrust session occurs when the New York Stock Exchange's decline-to-advance ratio is 2-to-1 or greater, and simultaneously has a similar ratio of up/down volume. Present thrust session levels are similar to those previously reached in May of this year, June 2004, and March 2003 -- all high-fear junctures that were near intermediate-term bottoms.
Nasdaq 52-week high-lows: As the chart below shows, the cumulative high-low index has reached levels that in the past have been good buying junctures. Do note, however, that this most recent peak is much less severe than prior periods that formed better bottoms. That implies a more modest bounce off of the lows.
Going to Extremes
Source: Redwood Technimentals
Moderating bullishness: One measure of bullishness I like is the American Association of Individual Investor's sentiment index. It was 51.4% a month ago, sliding to 43% and then 32% this week. Ideally, I like to see this in the teens or even low 20s, but it is still apparent that some of the excesses have been rung out. The moderate number is why I can imagine the bottoming process taking a bit longer, and also why I am not looking for a monster rally.
Nasdaq 100 MACD buy signal: When the number of Nasdaq 100 stocks on a MACD buy signal exceeds 75%, it often precedes positive price gains. As of late, this figure has been near the 50% level. This has now formed a higher peak. While not yet aggressively bullish, this at least ends what is thought of as "bearish implications." At the very least, this is no longer a negative factor.
All of the above confirm my expectations that the markets can grind higher for the rest of the year.
Still, my expectations for a rally are modest, i.e. a 10% move for the Nasdaq 100. The
could run as far as the 1280-90 area. With a bit of luck, the
Dow Jones Industrial Average
could even see 11,400.
Beyond New Year's Eve, I become increasingly bearish. I don't see a collapse, but rather a lack of lift in the first quarter. I don't expect the serious trouble until later in 2006.
But for now, there is a year-end rally in the offing. Enjoy it while it lasts.
There's an old saying: I cannot hear what you are saying, because what you are doing is speaking so loudly. That's my take on the
: If it really believes inflation is so "contained" and "transitory," then why is it hell-bent on tightening rates for the rest of our natural lives or until the next recession, whichever comes first?
The answer, in case you haven't been paying attention, is the
robust inflation coursing everywhere through our economy, save for wages and personal income.
Indeed, real wages are actually down 2.3% for the third quarter. Total compensation costs (wages paid plus benefits) are down 1.5% on an inflation-adjusted basis. That does not bode well for consumer spending into 2006. This comes when the consumer is running increasingly low on dry powder. As we noted previously, the consumer is nearly -- but not quite -- shopped out.
Meanwhile, actual growth -- and not the estimated, preliminary Commerce Department's GDP data -- remains modest.
This helps explain why my bullish posture is short term in nature, and measured at that.
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Barry Ritholtz is chief market strategist for Maxim Group, where his research and market analysis are used by the firm's portfolio managers and clients in the U.S., Europe and Japan. He also publishes The Big Picture, his macro perspectives on the economy and geopolitics, entertainment and technology industries, and is a member of the board of directors of Burst.com, a streaming media software company. At the time of publication, Ritholtz had no position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ritholtz appreciates your feedback;
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