Securities Research Services

Friday, July 20, 2007

Long Term Outlook Strong

For the first time in months we saw the put call ratio on the major indices move up to even. This may mean that the crowd is turning less bearish, but it is also possible that this has to do with reshuffling taking place in preparation for expiration today. Nevertheless, it's a development that needs to be watched closely. The market has moved a long way very quickly and could be due for a brief pull back. If the crowd starts to turn bullish, this could be the trigger the market needs to set up for profit taking.

Despite the overbought condition near term, the long term charts look great. In particular, the NASDAQ has now experienced three solid weeks of follow through after breaking out of its multi year trend channel. It broke out of the channel last April, then spent the next two months consolidating and building a base of support. Now that it has followed through we have a chart set up that could lead to a multi year move higher (with pull backs along the way of course).

We keep hearing commentators talk about how exuberant the crowd is getting. We see no evidence of this. In fact, that so many commentators are warning of over exuberance is an indication that the crowd is still trying to find reasons why this market rally can't be trusted. It is when everyone is wild with enthusiasm and the commentators are all finding bullish reasons why the rally can extend that we need to start getting concerned.

Claims that the crowd is bullish at this point seem disingenuous to us; either that, or they are the fodder of cognitive dissonance.

No comments: