Tuesday, February 21, 2006

CASH IS KING

That's right, no one will believe it, but I'm changing my opinion onthe market from bullish to neutral/bearish. You may be thinking toyourselves how can he change his opinion as the DOW is making newhighs, and the NASDAQ and S&P are close to doing the same? Becausethe headlines tend to lead you in the wrong direction, marketinternals on the other hand, give you a clearer picture. I lookedover 2,000 charts last weekend and more this weekend, and what I sawjust looked bad. Here are the reasons for my change in opinion:

1. Leading stocks are breaking down.
2. Most of the leaders that are making new highs are doing it onlower volume or are going into climactic looking runs.
3. The majority of new stocks trying to breakout are failing veryquickly, or lack volume, or their relative strength (RS) lines arelagging.
4. The DOW is rising, but on lower volume.
5. The DOW is just not a leader that holds the market up for long.It is made of up mostly mature fairly priced stocks.
6. IRAN - This is the biggest uncertainty of them all!!! The marketwill most likely wait until at least March to see Iran's reaction tobeing referred to the security council.
7. Interest rates, even though they will stop after no more thenanother two moves, the ambiguity of the Fed governors is creatinguncertainty about the number of rate hikes to go. Again, we mayhave to wait to see how this plays out in the first half of thisyear.
8. Earnings - Well they were good, but revenues just disappointed,including forward guidance. It's a matter of time before thesecompanies throw the baby out with the bath water and wash theirearnings out. Second quarter earning's reports look set up forthat. This way, going forward, comparisons will get easier.

Unlike in December, there is just not enough underlying pressure tomove this market much higher. There is more downward pressure fromformer leading sectors such as oil, commodities, homebuilders, andetc... With their big moves the last few years, they now make up amuch larger percentage of the indexes.

I still believe the market may have another small push higher, but Iwould not stick around to see if the next leg down is a constructiveone. The next leg will get ugly as they will take everyone elsebehind the barn and shoot them. This will finally create the fearrequired to give us the big move.

Here's how we're and you should be handling this market:

1. Sell all laggards.
2. If you need to be buying, buy only the quality names, and stickaround only if they manage to hold their gains.
3. Any stocks that are still moving higher in your portfolio shouldbe held only as long as they continue to act technically right.
4. If the market starts to undergo distribution, it would be wise tomove almost completely to cash, if not completely.
5. Good time to be looking for shorts.
6. Start making your list of potential buy candidates once themarket gets going again. Update this list frequently.

From the research I have done, it seems that we are looking at aminimum of 2 - 3 weeks more before the market can right itself. Ifthe leg down I am expecting is really bad, it may take at a minimumof 1 - 3 months. About the typical length of a correction or bearmarket.

Tread carefully. I may be wrong, but the research says otherwise.As always, be prepared, because the market will do what the marketwants to do. Our job is to be ready to take advantage of it, orprotect our capital from it.
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