Securities Research Services

Friday, May 12, 2006

We are Bullish Again; Sort of

As readers have noticed we have been bearish on the broader market for several weeks now. The Dow climbing while the Nasdaq lagged just didn't sit right with us. Likewise, it was very clear from our scans that stocks were not going up with the indices yet on the bad days stocks have been participating in droves. Yesterday's ugly day has been projected by the writing on the walls for some time for anyone willing to pay attention to the signs. When OEX traders bought five calls for every one put on Wednesday, we knew that the bottom was about ready to drop out. Options traders are by far the best contrarian indicator there is. When this group of not so lucky people get overly bullish like they did on Wednesday it is time to go short. So indeed the QQQQ broke its long term uptrend yesterday as we warned it might. Now the big question is what next? Well, the same group of options traders that were overwhelmingly bullish on Wednesday flipped to the overwhelmingly bearish side yesterday purchasing more than two puts for ever call. Their routine is almost comical in a twisted sort of way. Taking a bearish stance on the broader market over the next few months makes sense here but options are a time wasting asset. Their value depreciates over time and if you don't time the market just right your value goes up in smoke even as the market eventually goes your way. Taking a contrarian reading from this group of folks then we would expect to see the market, and specifically the QQQQs, find support very near yesterday's lows. In fact, this index ETF stopped right at its 200-day average. We may see it dip a bit lower today, but now is not the time to short tech. Bottom fishers very likely smell a bargain here and will buy beaten down stocks back up. When the market bounces it will be time to go short. We have drawn a likely scenario on this QQQQ chart:

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