Bull Pen - Fall 2006

[Birchtree]

Since Feb'04 the SPX P/E has been falling while the SPX has been rising. That is, earnings have been rising faster than the stock market, which has functioned to compress the aggrgate P/E ratio of the SPX quite significantly. The downward trend in the market's P/E ratio is now under some pressure to break to the upside, which suggests that P/E multiple expansion is quite possible over the next 1-2 years. Oh, I'm so bullish waiting for the mega-cap stocks to claim dominance.

 

[Birchtree]

"As for the Dow Theory, the Primary up trend was last reconfirmed on June 1, 2007."

http://www.safehaven.com/article-7913.htm

 

[Birchtree]

"As of 7/12 the HSNSI stood at 40.6%. In contrast at the market's late February high, when the Dow was below 12,800, the HSNSI stood at 62.4%. This is an amazing contrast. The stock market, in fits and starts, has managed to tack on more than a thoudand points while simultaneously pushing the average market timer from the bullish camp".

http://www.marketwatch.com Hulbert 7/13/07

 

[Birchtree]

Yeh!!! Where's that Wheels character - he should read that post.

 

[Birchtree]

"My studies tell me that we're now early into the third (there's that 3 again) or speculative phase of a great bull market."

by Peter Brimelow 7/16

 

[tsptalk]

by Peter Brimelow 7/16 To add...

"The higher U.S. stock markets go from here, the more likely it is that the shorts will run for the exits. Shorts are "captive buyers" - they must buy to exit their positions. If the U.S. market does continue its "melt up" in coming weeks, the shorts will exit.

"That would be a replay of the situation in August/September 1929 and 1987 and in January/March 2000."

All of which were followed, in case you didn't get it, by massive breaks ... make that "melt-downs."

In other words, look for things to get crazy good before getting real bad. 12% has been saying this.

 

[robo]

Tuesday, July 17, 2007
DJIA Closes at Another Record High, Boosted by Gains in Tech and Financial Shares


BOTTOM LINE: The Portfolio finished slightly higher today on gains in my Semi longs, Retail longs, Medical longs and Energy-related shorts. I did not trade in the final hour, thus leaving the Portfolio 100% net long. The tone of the market was mildly positive today as the advance/decline line finished slightly higher, sector performance was mixed and volume was above average. Measures of investor anxiety were above average into the close. Today's overall market action was mildly bullish. The major flaw in the bear case has been housing's overall impact on U.S. stocks. If it were not for housing's still substantial, but diminishing, drag on the U.S. economy, we would likely be facing multiple Fed rate hikes and rising prospects for a hard landing. Instead, U.S. growth is poised to rise around trend levels through year-end, after a weak first quarter, with diminishing inflation concerns and falling prospects for a hard landing. Tech and financial stocks were especially strong today. Numerous semi equipment stocks soared. This is a significant move as cyclical tech is gaining upside traction to join growth tech in substantial market outperformance. The MS Tech Index is now up 15.5% for the year and poised to move much higher over the intermediate term. Until now, the individual has almost completely shunned U.S. stocks. Today's TIC flow data showed a substantial increase in interest from foreign investors for U.S. stocks. As I have said many times before, keeping all investors, especially the US public, excessively pessimistic on U.S. stocks has been one of the bears' main weapons. I continue to believe that the “herd” will eventually turn more optimistic on U.S. stocks which will result in another substantial move higher in the major averages as rising demand and shrinking supply makes for a lethally bullish combination.

Posted by: Gary / 5:01 PM


http://hedgefundmgr.blogspot.com/

 

[robo]

Friday, July 20, 2007
Is The Smart Money Long Or Short Stocks?


Above we have a 5 year weekly chart of the e-mini S&P futures contract courtesy of barcharts.com.

There are 3 colored lines in the lower pane which represents the net positions of the 3 players in the market. The three players are the large, small and commercial traders.For this post lets just focus on the red line which represents the net position of the commercial traders.

If the red line is above the zero line, it means the commercials are net long, if the line is below the zero line the commercials are net short. As you can see in the above chart the commercials are holding their largest net long position compared to the last 5 years.

Lets take a look at what happens to the market when the commercials are holding a net long position of at least 100,000 futures contracts.

Back in February of 2003, the commercial traders were net long over 100,000 contracts and that was the bottom of the market.

August of 2003, the commercials were long and the market continued to rally for the next 6 months.

In June 2006, the commercials were once again long over 100,000 contracts and the market exploded higher over the next year.

So here we are in July 2007 and the commercials are holding their largest net long position compared to the last 5 years.

If you believe the commercials are the smart money and you believe in their track record (which I do), I would say that you would have to be very bullish on stocks in the months to come. I'd rather follow what the commercials are doing as opposed to some guy on television saying the market is overbought or that I should have sold in May and gone away.

There are many people who are bearish on the S&P based on all kinds of reasons ranging from it's the 7th year of the decade to higher interest rates. Those things may be true yet the market keeps going higher and when you look at the above chart it's hard not to be bullish on stocks.

As long as the market is making higher highs and higher lows and people continue to be skeptical about the rally, I will play from the long side and buy the dips.

http://kevinsmarketblog.blogspot.com/

 

[Birchtree]

"....a spiking VIX is seen as a bullish sign from a contrarian standpoint. In fact, according to the latest data the insiders are now buying stocks at their heaviest pace since the last bear market ended in March 2003". I'm excited because I remember how difficult it was back then to buy each bottom of the triple bottom sequence. 2003 was one sweet ride.

http://www.financialsense.com/editorials/droke/2007/0803.html

 

[Birchtree]

"Therefor, from my perspective of Dow Theory, the Primary Trend remains bullish".

http://www.safehaven.com/article-8158.htm

 

[Birchtree]

"The 15-day moving average of the total put/call ratio hit a reading of 122, its highest reading in almost 20 years".

http://www.financialsense.com/editorials/droke/2007/0813.html

 

[Birchtree]

Will the stock buy backs continue? In the first quarter companies in the S&P 500 stock index spent nearly $118 billion to repurchase their shares, more than in any previous quarter. Share repurchases have topped $100 billion for six straight quarters, a streak that seems likely to continue intoi the second and third quarters. Companies announced $157.4 billion of buy back plans during the second quarter, up nearly 58% from a year earlier.

 

[Birchtree]

"It almost seemed as if the market was about to ignore every known Contrarian Principle and was going to smash through every significant support level on its way to a major crash. Up until now the stock market has been mostly an insider's affair with the Small Investor not being invited to participate. (This includes many of my TSP friends). He has been consistently scared away by a ceaseless fear campaign in the media that has been underway since 2004. Every time the Small Investor gets even remotely bullish on the stock market he is again scared away by a sudden correction and the fear of an even greater decline that always comes with it. When will the Small Investor be invited back to participate in this bull market?..."

http://www.financialsense.com/editorials/droke/2007/0820.html

 

[Birchtree]

"If the capitulation has already taken place as evidenced by Thursday's data and the majority of market participants/advisers are now stark bearish, who is left to sell"?

http://www.financialsense.com/editorials/saxena/2007/0822.html

 

[Birchtree]

Wonder Woman, if you are lurking please come forward. The NYSE McCellan Oscillator (Ratio Adjusted) Index has posted a nice buy spike to +69.17 and that has caused the NYSE Summation Index (Ratio Adjusted) to curl up at -747.79. History dictates we may see or can expect a smooth move back to +1200 and beyond. Show me Dow 15,600 and I'll be quiet.

 

[Birchtree]

"Stock purchases by executives at banks, consumer lenders and insurers in the SPX climbed this month to the highest in 12 years. That is the strongest buy signal. Directors added to their holdings as the rising cost of credit spurred by mortgage defaults sent the S&P 500 Financials Index to a 13 month low on Aug 15. That is a good sign that people closest to the business have confidence in it and invest in it. The seven days ended Aug. 14 had the most bullish insider sentiment that has ever been seen in the financial space. The last time insiders bought more shares of financial companies was in October 1995. That was three months after the Federal Reserve cut its benchmark interest rate to 5.75 percent from a four year high of 6 percent. The central bank lowered borrowing costs again in December 1995 and January 1996, helping to spur a six year rally in financial shares. "

http://www.bloomberg.com/apps/news by Hauck and Patterson

 

[Birchtree]

"The earnings yield is an important measurement, since it helps investors compare the yield on stocks versus the yield on safer government bonds which is currently around 4.5% for 10 year notes. In other words, what yield would entice investors enough to invest in a riskier investment such as stocks versus a lower risk investment such as government bonds? Now if rates were to fall to 4% it would give room for the PE ratio to rise to 20, or an earnings yield of 5%. Which raises the question, will interest rates go higher or will they go lower?"

http://www.[[financialsense.com/fsu/editorials/wagner/2007/0831.html

 

[Birchtree]

"Contrarian analysts somtimes use a rodeo analogy to describe the psychological characteristics of a bull market: It can be thought of as a bucking bronco, trying its darndest to throw everyone off its back on the way to the other side of the rodeo ring. Sentiment trends over the last month suggest that the stock market is doing a credible job of just that."

http://www.marketwatch.com Mark Hulbert - Labor Day Blues 9/4/07

 

[Birchtree]

"On three of the past dozen trading sessions, stock market volume triggered a bullish technical signal known as a nine to one upday. (also known as a Zweig thrust). Every bull market in history, and many good intermediate advances, have been launched with a buying stampede that included one or more 9 to 1 up days. A 9 to 1 up day was turned in in Aug. 17, Aug. 29, and Aug31. This is a triple signal and stronger than a double signal. The last time a double 9 to 1 signal was triggered was on March 21. An investor who bought the S&P 500 at the close on March 22 and held for 60 trading days realized an annualized gain of 31%" IMHO the bull is getting ready to snort again.

http://www.marketwatch.com Mark Hulbert - Bullishness by the numbers 9/5

 

[Birchtree]

"We have maintained a very bullish theme on equities in general and once we clear the historically bearish month of September, we expect the bullish long term trend to resume." This article has some nice graphs.

http://www.stockcharts.com/commentary/archives/cww20070907m.html