Thursday, December 08, 2005

Rising Negative Sediment Offers Opportunities

Technical

Both the nasdaq composite and S&P500 have shown signs of weakness recently. This is expected given the meteoric rise of both indices. Now sediment has become more negative driving some investors to take profits. This action in turn has caused the indices to form a basing chart pattern. In this stage of the rally there is likely to be a shake out. We expect increasing volatility and opportunities to buy good stocks at better prices. That said, both indices have broken a steep up trend thus increasing risk above normal levels (to nasdaq 2219 and 1245 on the S&P500). We are carefully adding to positions and take some profits in others.

Change in Sediment

Over the last week I have noticed an increase in negative sediment. Granted, investors have been pretty bullish of late, however, there has been a more rapid decline in the number of investors who believe that the market will move higher this year. The reports out of Iraq threatening middle east oil supplies, cold weather in the northeast, higher commodity inflation and a report out of UCLA predicting the loss of 800,000 jobs in the housing industry have put a damper on the recent rally. But the smart money knows that business in the US is booming in many sectors. In our discussions with various managements we are finding increasingly positive outlook for business. Further, it is our belief that commodity and energy inflation are the result of growing business and not stagflation as evidenced by the sharp rise in productivity. Analysts are still raising earnings for many groups and mid-quarter reports from Texas Instruments and Qualcomm are backing them up. Another surprise is the home builders. They continue to have rising profits. In short all this adds up to a robust economy, oh yeah the Government also raised GDP estimates.

We feel that recent stock market weakness is a normal given the sharp rise in stock prices and that the basing pattern forming in the charts of the nasdaq composite and S&P500 is healthy. It is our assertion that improving fundamentals and technical strength make this market more of a buy than a sell. That said, we are aware of the risks and may make moves to limit our exposure to volatility.

  • BOOM - Dynamic Materials is a new addition to our fund. The stock ranks second highest, just below Apple, in technical and fundamental strength. Recently, the stock while basing in the $24/share range experienced a break out to $30/share. We feel that BOOM has more upside. We like the growing niche that is the company's core business (cladding) and the potential that exists for the company to be acquired. We calculate IV to be $52/share.

Sunday, December 04, 2005

Key Market Factors Revisited

If you follow this blog on a regular basis you may have noticed the down time to our site. Although technology propels much of our lives, sometimes it forces us to take a step backward. We experienced some technical challenges last week that we were unable to surmount, for that we apologize.

Technical (market)

The market continued to move higher last week adding to its string of advances. Although all most the major indices were positive on the week it appears that the S&P500 started a basing pattern. Short term technical indicators signal the beginning of an over bought market and may foretell of a small correction. However, the fact that the nasdaq, often a leading indicator, started to break out last week may signal that stocks have more room to run. Multiples are such that this market can move much higher. The question right now is will it happen all at once or after some profit taking? We continue to add to some of our positions on the dips. We expect volatility to pick up starting around Thursday as investors trade through the FOMC meeting next Tuesday and options expiration on the 16th.

Key Market Factors

I have not addressed the Key Market Factors for a few weeks, so I will do it today. Our Key Market Factors rating remains at Neutral. I know the market is moving higher and the Key Market Factors have remained the same, however, markets move first on speculation of change and not when the change is obvious. Our Key Market Indicators is an objective rating and we too speculate as to its ultimate out come.

Oil NYMEX - $58.10 - (negative +)[score -1] - After several weeks to the downside crude oil moved higher last week on speculation that colder weather in the east will increase demand and the fear that OPEC may cut production. Most crude oil traders seem to think that oil is going lower, in fact Boone Pickens projected $50/barrel oil in the short term. All the negative sediment is likely to drive oil higher. I would expect rising oil prices in the short term.

10 year Treasury - 4.54% - (negative +)[score -1] - Treasury yields on the 10 year were down two weeks ago but have risen on speculation that the Fed will raise rates next Tuesday. It appears that the Fed has pricked inflating housing prices and at the moment price stability is intact as core inflation remains low. We believe that rate hikes are coming to an end, in fact we feel that rates may already be too high. That said, it looks like two more rate hikes are in the cards according to the futures market.

4th Quarter Earnings -14% - (positive)[score +2] - Smart money types continue to speculate that double digit earnings are going to be a reality in the fourth quarter. The economy remains robust as the Government recently revised GDP estimates higher and, as mentioned above, core inflation remains low. Further, many companies have stock buy back programs in progress, which tend to pump up eps, as a way of productively using their excess cash.