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Look Under the Hood Before Buying


Without looking under the hood you don't even know if the engine is in there, let alone know if it runs well.

What's the takeaway from the following charts? (All charts courtesy of

Below find a SOX chart with notes.

Click to enlarge

This monthly chart shows the fewest stocks over 200 day moving averages on the Naz since the lows of 2002 and 2004.

Click to enlarge

This weekly chart illustrates that more stocks are distressed than in the 2006 stock option backdating period, while confirming the 2004 lows.

Click to enlarge

This daily shows how distressed we have become versus the August and November/December lows of last year.

Click to enlarge

Finally, this Naz 100 chart versus the total Naz shows how the Q's are masking the damage to the broad market. A reading of 38% is quite low but not nearly as washed out as some prior lows.

Click to enlarge

So does this mean that we will see the small/mid cap stocks within the Naz bottom first, while some of the "anointed" names are still sold for liquidity purposes? Or does this mean that the large cap stocks have just held better due to cycle patterns? Or does this portend to even weaker broad stock action if the large caps can't rally? Or are we bottoming and simply due to the machine-based selling, higher beta is just going to take the punishment until the Fed is less restrictive?

I honestly don't know. There could be a little truth in every question. What is clear is the amount of damage being done to many stocks in the market has been masked by the cap weighted averages. And just looking at the Market Cap weighted averages and saying we are only off 10-15% off all time highs, so therefore things are not that bad, is really missing the picture completely. That would be like buying a car, without a test drive based solely on a good paint job. Without looking under the hood you don't even know if the engine is in there, let alone know if it runs well.

A lot of damage is being done to many companies, some of it severe. Prices are falling rapidly in housing, finished goods, resale markets, and hundreds to thousands of stocks. This is quintessential deflationary action people. But you have to look beyond the topline Dow and QQQ to see it. I was very glad to see that Kevin Depew has picked up on this call as well and is recognizing the conditions becoming evident around us. But you have to look under the hood and turn the key to see it. Currently, the American V-8 engine is in serious need of a tune-up. Further, if the tune-up doesn't arrive fairly soon, it will be overhaul time. The overhaul would end up being a lot more costly and take much more time to repair than the tune-up.

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No positions in stocks mentioned.

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