Friday, May 20, 2005


After big moves there are always consolidation days. Today was one of those days. Not that the market did poorly but the bounce in energy issues slowed the pace of the recent winners. The long-term energy problem has not been solved. I am not a buyer of energy stocks here but the bounce is not a surprise. The main thing to take away from the energy crunch is that major changes are ahead. One is the silicon car. Cars are all being converted to a 42 volt system. This change will provide the means for many energy saving innovations. Money can be made by buying the right parts makers. But, let's get back to the technical picture.

Closed end funds are trading down. The discounts are widening. This has historically been a good contrary indicator. It suggest stocks should be bought.

AAII Sentiment is at the lowest levels seen since October of 2002. My family used this and other indicators to load up the truck in 2002. The market soared. Buy stocks!

Investors have been only modest buyers of US stock mutual funds in recent weeks. Another historically good contrary indicator. Buy stocks!

Mutual fund cash as holdings have recently risen sharply. Buy Stocks!

The average Price-Earnings ratio is the lowest it has been in 9 years! Buy Stocks!

The T-bill rate of change has dropped! Everyone is talking about the Fed's move to raise short-term rates but the momentum of the shift is dying quickly. Of course a quarter point move off the low of 1% move is a much bigger move than a quarter point move off a 3% base but this is not all. T-bills are now trading around 2.8% (bond equivalent yield) which is a discount to the Fed Funds rate. Also, the future markets are pricing in a pause or two in the increases.

The public to specialist shot sale ratio is very high. The specialist, who tend to be on the profitable side of the market, are in a historically lopsided long position. Traders, who as a group often lose money, have sold tons of stocks short. Many of these shares are at least partially hedged against bonds, convertible bonds, preferred stocks, leaps and options. Many of these hedged positions were put on to take advantage of the sideways market. Many of these hedged positions are spread trades to earn a little money while waiting for the smoke to clear. In the past week, there is considerable evidence that many of these hedged positions are being unwound. In many cases, the unwinding requires the purchase of stocks that were previously sold. Buy stocks!

Oops! There is at least one skunk in the hat. The market has quickly gotten to a short-term over-bought position. Markets often take a break or retrace a portion of a significant move before getting back on trend. The significant resistance area of the past year is within reach. Traders suggest taking money off the table after such a nice run. I am not a short-term trader. I sell short-term to cut losses short and to take advantage of tax breaks but, in general, I hold long-term positions. In my experience, there is more money lost by taking money out of the market at the wrong time than by putting money into the market at the right time. Timing short moves is extremely hard.

Fundamentally, stocks are cheap. Many technical indicators suggest the lows have been made but the break-out is yet to occur. The market seems to like the idea that more conservative judges may be approved when the filibuster of judges ends. Conservative judges could cut business over-head costs by substantial amounts. Law suits costs some businesses a bundle but the treat of lawsuits cost consumers and businesses billions. Consumers and companies could benefit from conservative courts for years to come. The vote in the Senate should take place soon.