Saturday, May 2, 2009

Volume 3, Issue #33

Also in Today's Issue...

     My data indicate that we have a correction coming at us like a freight train. The Counter Cyclical Market Forecast chart (see below) is showing a rapidly rising Composite Index (combined new Buy Signals and new Short Sell Signals) that has moved well above the Short Sell Index. This is much like a large tree that is in an ice storm. The tree can withstand a lot of ice, but if the conditions are right, the ice will continue to build up, getting heavier and heavier. The tree's major limbs continue to hold up, but there comes a time when the ice just gets too heavy... then, there is a catastrophic failure as large limbs suddenly snap and come crashing to the ground.

     This 'ice-building scenario' is where we are in this current market rally. Too much money is being poured into too many equities. The weight of being over bought continues to grow and grow and grow. There is not enough rational fear in the market. Too many stocks are moving higher.

     In the stock market, normally, there is a reasonable balance between stocks moving higher in price and those moving lower in price. In Bull markets the ratio is weighted with a somewhat heavier bias toward the Buy side. In Bear markets, it is weighted somewhat more toward the Bear side. However, if ratio of Buying-to-Selling moves too much to the Buy side, the market will always, at some point, correct back to a more balanced ratio.

     Investors who believed this was just another short-term Bear rally stayed out, but now they are beginning to fear that this is the great rebound into the next major Bull market. Many are in a panic and are buying almost indiscriminately.

     The short sellers are also beginning to panic. They are now becoming fearful that this is a Bull market and their short positions are getting crushed. They have to stop the bleeding by covering their short positions, which requires more panic buying.

     All this panic buying is pushing stock prices up higher and higher and higher. In my ETF Global Market portfolio, the average holding is up +4.5% in just the past three weeks. The average unrealized gain in the Market Trend portfolio is a whopping +16.1%. In my managed accounts the story is also extremely good. The holdings in Equity I are up an average of +8% with several positions holding +18% to +38% in unrealized gains. Equity II is holding a very solid average of +8.4% with 50% of the positions holding double digit gains.

     This is great and although I only have 30% of the portfolios invested, we are moving solidly higher every week. But this will soon end in a very sharp correction. In the meantime, I want to let my winners run, but keep the stops tight.

     I am pushing the stops higher each week and am getting very aggressive with my stops. At this writing, not nearly enough of the stops are above each equity's respective cost basis. This concerns me as we could lose a lot of these profits in a correction. As such, this week, don't be surprised if I raise stops often. I may put on some trailing stops. My goal is to put these profits in the bank before the correction hits.

     I still believe (hope, actually) that the correction is more than a week away, based on the Bull/Bear Rating. But, investor sentiment could change abruptly.

Note: The TurnerTrends Counter Cyclical Market Forecast Chart estimates the near-term direction of the market from a contrarian perspective. The red line (New Short Sell Index) shows a technical direction and the degree of strength of Bearishness. The black line (Composite Index) is the combined impact of both the new Short Sell Signals and the New Buy Signals and is an indication of the degree of oversold or overbought condition of the market. Buying opportunities exist when the Composite Index is moving higher. Market bottoms are represented by a change in direction of the Composite Index from moving lower to moving higher. Market corrections are projected when the Composite Index crosses the Short Sell Index, which is an indication of an overbought market. The market is represented by the light gray shaded area which shows the relative month-to-month gain or loss of the Dow.

-- Mike Turner
Editor
Mike Turner's Market Report

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