Securities Research Services

Thursday, November 30, 2006

Tuesday was but an Aberration

Tuesday's hard dip, it turns out, was just an aberration in an ongoing strong uptrend. Weak hands were shaken out and new shorts were put on, but the market continues to move forward. Short positions are likely to be covered higher, further driving prices higher from here. Likewise, performance chasing fund managers are likely to run this market higher into the end of the year. We will worry about January's tax selling in January. For now, this market remains hot and oil has taken over as the market leader once again.

Wednesday, November 29, 2006

Looking for Consolidation

Dip buying was aggressive yesterday, but their remains pressure from European profit takers, which should keep the market in back-and-fill mode over the rest of the week. From the European perspective the market has been in a correction since the dollar started falling heavily last week. The US market in Euros is quite a different picture than it is in dollars. Nevertheless, the discrepancies should even out over the next week as we are seeing good accumulation take place into the dips. The gold and oil sectors remain under heavy accumulation and moves in both these commodities could last into next year. Blue chip stocks are also in good shape here and as early as next week we should start to see new highs being reached.

Monday, November 27, 2006

QQQQ still in Line for $45.50

With the short week last week and the light volume on Friday, data from last week's close is not reliable. As such, we will withhold comments on market conditions today. We will say that while the market is vulnerable to a good hard pullback event, overall the trend is in great shape and sharp pullbacks may prove to be buying opportunities. For now, however, we continue to look for the QQQQ to run to $45.50, where it has significant resistance.

Wednesday, November 22, 2006

Holiday Rally Underway

Whether or not we are nearing the end game for this bull run, stocks and the market in general are looking very healthy here. In fact, momentum has a chance to pick up significantly with market's in the East now in strong rally mode (even Japan, which until yesterday had been quite weak). Dell is up 9% after hours, which should spark a fire under the NASDAQ. Unless we get a sell-the-news response, it's a good idea to stay long and enjoy the profits. We wish everyone a Happy Thanksgiving! Have a great weekend. We will reopen for business on Monday after the holiday weekend.

Tuesday, November 21, 2006

Broad Market Trend Showing Signs of Aging

Not much has changed since Friday's trading, so we will keep this brief and just summarize the current environment.

The QQQQ has a likely target of $45.30-$45.50. Given the money flow erosion on the Dow and the fact that other world markets are now breaking down (Japan in particular), it is important to not open any new long positions in the broader market here. We recommend focusing instead on the commodity sectors, which seem to have more potential at this late stage in the game.

Monday, November 20, 2006

Holiday Week Tends Towards Bullishness

We have a holiday week this week, so volume should start to thin out on Wednesday and be virtually non-existent on Friday when the market reopens. Nevertheless, last year the market was able to extend its gains during Thanksgiving week, and with the technical picture looking remarkably similar, we would not rule out a continuation of the current rally as we approach the holidays this year as well. We do recommend that everyone start moving more of their money into commodities. Oil has been a dog during the market rally, but is now oversold and firming up nicely. Some of the major oil companies like XOM and WMB have in fact broken out even as the price of oil has been testing its lows. This divergence tells us that the price of oil is likely to make a comeback and disappoint the oil bears who continue to doubt the long term energy trend.

Friday, November 17, 2006

Sitting Tight Through Today's Expiration

The QQQQ continues to be due for a pull back to its uptrend line provided in Wednesday's report. Continued gains from this level without a pull back make for an unstable climb, which would leave it more vulnerable for a hard correction. Despite the fact that this trend has been alive for longer than we have been used to trends lasting over the past couple of years, most technicals are in pretty good shape. Beyond that, we will refrain from calling a top. So many analysts continue to call for a top and as such have kept their followers from participating in this trend. Stops will take us out when the trend reverses. Once again, price is king and price remains solidly up.

As for today, today is options expiration and we tend to like to sit back and wait out this day each month. Options week is hard enough to navigate and on the day of expiration, price action can be even more meaningless. Next week is a short week as well, so it's a good idea to manage open positions and not open anything new unless something extraordinary presents itself.

Have a great weekend everyone!

Thursday, November 16, 2006

Charts Continue to Look Healthy, but Expect Consolidation

The QQQQ may have made a near term top. Sentiment has grown overly bullish and yesterday's Fed meeting minutes took some steam out of the move late in the day. We still think that the probabilities are better than even that the QQQQ will test $45.50 over the next few weeks. Be slow to become bearish here. We suspect that the top the QQQQ made yesterday will likely turn out to be similar to the tops made on both October 16 and October 26. A sharp pullback here would do a good job at taking the wind out of the bull's sails, giving the dip buyers a chance to get back in again at lower prices. As long as the charts in our scans continue to look healthy, we plan to stay bullish. Price means much more than all other arguments and price remains bullish. Note: A long term selection was sent to subscribers today via email.

Wednesday, November 15, 2006

QQQQ Has Room to Move

The market followed through higher yesterday. Of particular interest is the fact that the semi conductors and small caps broke out. Certainly this rally is nearing its end stages. Nevertheless, the trend is still up and top calling has been killing the speculators for months now. We think we have some insight into where this market may be headed over the next few weeks. The QQQQ seems to be providing clues to those paying attention. First, yesterday's rally put the QQQQ back at overhead channel resistance. The S&P and Dow both have some room to move, but the QQQQ at the very least needs to correct by trading sideways for a few days in order to maintain the parameters of the trend that has been in place since August.

From the chart above you can see that the immediate trend doesn't have much more room to spare before a correction takes place. Panning back to a 5-year view however note that the QQQQ is gunning for its overhead channel resistance. Sine 2004 the channel top drawn on the chart below has been turning back the QQQQ. Over the coming weeks this resistance area of $45.50 should act as a price magnet. What happens after the QQQQ reaches this area is anyone's best guess. It is interesting to note, however, that the S&P and Dow have both taken out their overhead channel resistance and are continuing higher. It's too early to know if this has any real significance. For now though, the trend remains friendly to bulls.

Tuesday, November 14, 2006

Maximum Pain Could be Painful for Bulls Friday

The QQQQ pushed slightly over resistance yesterday. However, options expire on Friday and far too many bulls are holding profitable call options at this point. This means that bulls are likely to feel some pain this week as options sellers attempt to park the car in the garage of maximum pain this week. When dealing with major resistance, first breakout attempts often fail. A sideways correction that lasts a few weeks may be necessary to work off some of the overbought condition. For now though it's best to avoid chasing breakouts. Dip buying this week may continue to be profitable however.

Monday, November 13, 2006

Outlook Grows Surprisingly Bullish

Over the weekend we scanned stocks making fresh 52-week highs and then we examined these stocks from four separate time frames. We were quite surprised by the results. A little background is in order before we get into more details though. Mid summer this year the market outlook was about as dire as it had been in some time. The market for two years had been bumping up against overhead resistance and was contained in a depressingly tight range, which made trend trading all but impossible to profit from. The first part of this year had the market in a steady decline, which made it look as if the Fed's interest rate hikes were about to send the market into the next leg down from the bear market which had begun in 2001. Just when it looked like the bottom was about to fall out though, stocks rallied. The rally had many problems in its early stages, which we pointed out in detail in this report. However, as the rally continued, it firmed up and stocks started to behave better than we have seen them behave over the past two years that the market has been caught in its trading range. Getting back to this weekend's scans. Scan criteria included: stocks that are trading between $1-$50; which trade at least 250,000 shares per day; which are also making fresh 52-week highs. An astounding 489 stocks met these parameters. This is up from only 50-60 just a few months ago. Nevertheless, the QQQQ is back at major overhead resistance and the market is overbought. This gives us some pause. What perked up our interest even more though was when we scanned through each of these 489 stocks on their 5-year weekly charts. What we found when we did this were not a group of stocks undergoing distribution and bumping up against resistance. Instead, we found a large majority of these stocks already breaking out to fresh 5-year highs; trading firmly above resistance. Moreover, most of these stocks are not in the process of exhaustion-type moves, but are instead just steadily moving up on solid volume and solid technicals. Keeping our feet on the ground. We can't lose our heads here and grow Pollyannaish about the future outlook since this market remains due for a correction. But, if the QQQQ can keep chipping away at resistance and if the group of leaders in our scans can continue to build on their gains over the next couple of weeks, we may indeed be looking at the onset of a major multi-year bull move, the likes of which we have not enjoyed for two grueling years. We are keeping our fingers crossed and will admit we were wrong if bullish moves start to fail this week.

Thursday, November 09, 2006

Market Continues to Rally

The election didn't slow buyers down and tech was under heavy accumulation yesterday. The QQQQ has a decent chance of breaking out to new highs from these levels. If it can muster continued buyer support and close over $43.20 for the week at some point this month, we would then likely see the rally into January. A QQQQ breakout would give buyers confidence to start buying up the high beta small caps once again, giving us more faster moving stocks to choose from. Right now the main strength remains in the big caps so patience is needed. Note: We will be taking tomorrow off.

Wednesday, November 08, 2006

Government Gridlock Likely Priced In

Democrats took over the lower house and as of the time of this writing, have a fair chance at taking over the Senate. The election outcome was in line with the latest polling results so the outcome is likely priced in to the market. Today's early trading might see a bit of selling by those convinced that a democratic congress is going to lead to bigger government and more spending. By late morning or early afternoon this should be muted or reversed. A democratic congress provides the nation with two years of gridlock; an outcome that will most likely put a cap on the big spending that has been taking place. While the election outcome is not likely to be the catalyst which launches the market toward its next move, now that the market has one less "unknown" behind it, business as usual can now get underway. Blue chips, which led the way up, are now undergoing distribution so we may be very near a correction. How big of a correction remains to be seen. With the recession now less probable than before Friday's employment report, the long term market outlook is less bearish. This however does not mean that the market cannot return to the summer lows before it rallies back up again.

Tuesday, November 07, 2006

Dull Day Likely

Today's price action should be muted as the market awaits election results. Gridlock is what the market wants and gridlock is likely priced in. If the Republicans can pull off a surprise we are likely to see fireworks tomorrow. We will cross that bridge if and when we come to it.

Monday, November 06, 2006

Friday's Jobs Report Changed the Outlook

Over the past week have been discussing the economic trend as compared to the trends in the stock market and the bond market. To recap, the bond market has been projecting a hard economic landing from the last round of interest rate hikes and its inverted yield curve has been projecting a coming recession. Contrarily, those buying stocks have been betting on a soft landing and more stable conditions. Economic data over the past couple of weeks has born out that the bond market was correct and that the stock market was not. On Friday, however, stocks received a boost from the jobs report, which may vindicate the position of stock buyers and show that it was in fact the bond market which had it all wrong. Friday's jobs report surprised the market (yet again) by adding jobs that had been missed in prior reports. The adjustments in this report over the past two months seem to indicate that the economy is growing much faster than other data has been showing over the past months. In other words, it now looks like the stock market was right; we are in for a soft, not hard economic landing. What this does is put the future rate hikes question back on the table, meaning that the blue chip sectors may once again become less attractive. On the other hand, it makes the more speculative small caps more attractive since they offer the potential to outperform the averages and create returns that offset the earnings erosion from rising rates. The stock market still needs to digest the news and could be quite volatile this week as it works through the implications. We should start to see some of the small caps produce good opportunities on the long side though and the impending strong leg down we had been looking for may now be off the table.

Friday, November 03, 2006

It's not the Data, but the Market's Reaction that Matters

Today the market awaits the monthly employment. The market's reaction to this report will be much more informative than the data in the report. Right now the bond market is predicting a recession and the stock market has been shaken, but not broken on fears that the bond market is correct. Since last Friday the market has received two important additions to current data that reveal the trend in the economy (not the market mind you) is rapidly in decline. Today's employment report will add more data to the mix. We will be taking the day off today, not adding any new trades. Today's market could be choppy and the close for the week will be a better measure to make decisions by than the potentially confusing first and second reactions to this morning's pre market report.

Thursday, November 02, 2006

Recession Watch Heats Up

More data hit the wires yesterday forcing the market to contemplate what the bond market has known for a long time now; that a recession is just around the corner. The yield curve has been inverted for over three months now and as noted on Monday, the data about US economic growth shows a clear downward trend that is quickly heading toward zero growth. Nevertheless, indices closed near support levels yesterday and it is quickly likely that the inevitable will be staved off a bit longer as recently converted bears, who have now been conditioned to buy the dips, help push indices back up as we near next week's elections. If the market does crawl back up the hill here, it will make for a good low risk short opportunity. In the meantime, focus on gold and consumer staples and avoid the broader market like the hot potato that it now is.

Wednesday, November 01, 2006

Can Microsoft Save the QQQQ?

This market is getting tougher and tougher to trade as the possibility of a breakdown increases incrementally each day this trend ages more. Even so, the trend is still higher and we are seeing stocks firm up even at these high levels. MSFT, which plays a large role in the performance of the QQQQ refuses to break down and is now projecting a breakout of a multi year trading range. This could certainly change the technical picture for the tech sector.