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More of the Same October 8, 2011

Posted by Tom in Thoughts.
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“Lather, Rise, Repeat” or so the saying goes.  We’re in this broad trading range (again & again), so there’s not really that much to talk about in the area of new and exciting.  So oooo many theories out there, but no one really knows for sure what the next move will be.  I’ve attempted to graphically show them on the chart below:

3 possible directions, and 3 different theories.  Green is the optimistic “the bottom is in” theory.  Red is the “this is just a rally within a Bear Market” theory.  And Blue is the “we need to build a base for a while” theory.  All have some valid arguments, but then again no one knows for sure.  If “they ” did know, we’d be “there” by now. 

What continues to draw my attention is what I’ve stated before.  Taking a look at the lower volume bars, I note that volume increases on down turns (distribution of shares) and decreases on up turns (accumulation of shares).  This does NOT mean that the market has to go down, but it is definitely not a show of strength.  I lean toward the Blue and Red line theories for the time being.  Prices can and do rally on decreasing volume, but not for long. 

Let’s take a look at the Accumulation & Distribution pie chart of the broader S&P 1500 stocks:

                                              chart used with permission, HighGrowthStock.com; copyright 2010-11.

Now this chart shows the number (as a per cent of the total) of stocks in the S&P 1500 index that are in the different stages of A/D.  Green is good, Yellow OK / Caution, Red is not good.  This is an improvement from last week(you can see that chart in my newsletter, click on that tab above & click on the graphic to enlarge it).  But, it does not indicate “clear sailing” ahead.  Since we’re in a trading trade, this is clearly a traders market.  One would have to be nimble and quick to make and keep a profit.  So we wait before committing any major funds.

What’s hot?  Not much is truly burning things up, but sectors that are at least better than most are:  Auto parts & mfg., Industrial Conglomerates, Department Stores, Office Supplies, Household Products, Insurance, Software.  An area to watch are the Bonds.  How low can interest rates go?  I believe the risk is clearly to the up side for rates and thus bond prices will fall.  We see some of that in the Junk Bond market which is a mix of Risk and Interest Rates; these low-grade bonds have been falling.  The good news is that the higher grade bonds should move slowly and give plenty of time to exit.  Just keep an eye open for them “rolling over” on a price chart.

Have a good week and be careful.          …………..  Tom  ……………..

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