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Meat on the Bone


Can't you throw me a bone here?


Is there truly anything left on the bone for the bulls? To answer this question, we consider factors of price action, sentiment and seasonality (this should not exactly be a surprise to our seasoned readers.)

Short selling intensity remains in the market by virtue of the record levels of short interest on the NYSE and NASDAQ exchanges, and by virtue of the elevated "short intensity" of most sectors we follow, including technology:

Electronic technology has improved lately, a follow-through to the build-up to a plethora of short sellers. The nice thing about the current sentiment picture is that short intensity (see Average Short Rank in chart above) is as high now as at any time in the past decade, essentially matching the highest levels seen in 2001 through 2003.

Heightened levels of fear are usually a result of sharp declines in price. However, when you see fear rise in anticipation of price declines, the result is usually newer highs. Essentially technology stocks are higher than in 2001 through 2003 levels, but the fear as measured by our Short Intensity levels are at extremes - that is a recipe for more advances in price.

Currently there are 411 electronic technology issues above their 50-day moving average (see chart above) - certainly better than earlier this year but it could be higher. We suspect that technology will break out of its trading range and put pressure on the shorts this summer.

Small and mid cap stocks have done well since April 15th, but the annual seasonal cycle in the above chart suggests that the easy money has been made. With this month, the first of three peaks occurs over as many months, with the last in August (see arrows in above chart.)

The NASDAQ 100 index has shot up like a Roman candle in close correlation to its seasonal cycle (r = 0.25), but there are also seasonal peaks in June, July and August.

We anticipate the second quarter rally could spill over into the third quarter, primarily because the bears are the most at risk in this market. Until they capitulate, prices will improve, but seasonal factors have us looking only as far as August.

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No positions in stocks mentioned.

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