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Thoughts on Ramp



Here is my quick take on the tape today: As you know from a week and a half ago, I thought it would be a mistake to buy into a greater than 10% rally and extreme overbought condition using the daily charts. Yesterday I wrote about how the market was no longer overbought and said if it was going to hold, it should do it now. Well I guess the last two days' action answers that question. Now the question is, do you chase this ramp in the market?

I think the answer depends on what time frame you use. If you are only concerned with intermediate-term, then nothing changed. Just to break the downtrend (which transforms a chart from negative to neutral), the S&P 500 would have to rally more than 8% from today's prices.

If you are looking at the near-term, there are some differences from a week ago last Friday.

• The market is not overbought. At the March peak, more than 90% of the OEX and NDX components were overbought. The current reading (as of Tuesday night's close) was in the high 30s for both.

• When you look at the individual components that make up the indices, at the high in March, they were up in a straight line on a spike. The vast majority have consolidated those gains over the last week and a half and appear poised to break those March highs. In other words, one can't say they don't like the tape because stocks are overbought and up on a spike. In my opinion, neither is true right now.

• The fear over economic and corporate profit disappointments diminished in my mind because the market's reaction yesterday to a very weak ISM number suggests that any economic or corporate profit disappointment will be attributed to the war and accepted as OK. Ultimately, I think that is a mistake, but near-term, the market gave yesterday's reading a pass.

The above points don't suggest that the "all-clear" siren has gone off, but they do tell us that that might happen.

What would cause that? A move above the March highs for the major indices and their components would likely generate further upside. For the S&P 500, that would be above 896 (so lets call it 900). One way to do a spot check to see if it may happen is how the financials are doing. As I write this piece (11:30 a.m.), stocks like Merrill Lynch (MER:NYSE) are above the March highs.

I want to be clear. I have not switched into the new bull market camp, and remain in the "neutral-at-best" camp from an intermediate-term framework (12 to 18 months). That said, when I go through the individual charts and watch what happened yesterday with a bad economic number, there is potential for an identifiable rally (unlike the March spike that I did not see as identifiable) of greater than 5%, and as such should be acknowledged.

Again, how you take the action is up to each and every person individually. From an intermediate-term view, it might mean you wait for higher levels to cut back equity exposure. From a near-term perspective, a breach of March highs sets up for a very near-term upside tradable move.

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No positions in stocks mentioned.
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