Thursday, December 08, 2005

Rising Negative Sediment Offers Opportunities


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.


Anonymous Anonymous said...

What happened? the world Sediment is used twice in the opening prt of the blog. Shouldn't that be Sentiment??

4:58 PM  
Anonymous Anonymous said...

yeah I haven't seen any postings in awhile..I also noticed Burton took positive profits on shorts when he actually 'lost' money. Look at the Oct. recap...Hmmmmm

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