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Nick's Picks 5/29/4


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#1 TTHQ Staff

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Posted 31 May 2004 - 11:43 AM

NICK'S PICKS
A Decision Point Publication
By TraderNick

May 29, 2004

MARKET OVERVIEW:

As I'm writing this the new World War II Memorial is being dedicated in
Washington. Have a great time on this holiday weekend, but spare a moment to
remember the more than 400,000 men and women who died in the struggle to save
the world and the millions more who served and survived and built postwar
America into the greatest nation on earth. I will be remembering, in
particular, my late father, a career Army NCO who fought with the Second
Infantry Division all through WWII and Korea.

The stock market enjoyed its best week in more nearly two months as investors
seemed to put away some of their feelings of doom and gloom and stepped up to
the plate. Helping to key this shift in sentiment was, at long last, a break
in oil prices and a growing perception that maybe inflation may not be
gathering as much steam as they may have feared and the Fed won't be going
bonkers when it implements its stated intention to raise interest rates.

Pundits were quick to declare the market correction over. Hedge fund managers
were busily unwinding their hedges, and mainstream mutual fund managers were
buying stock with both fists. The so-called "smart money" has been piling in.
For proof, just look at the most recent NYSE Members Report data (normally a
couple of weeks old). Better than 741 million net shares bought, versus just
under 6 million shares bought the prior week.

In fact, the biggest threat to the market may be that people were getting a
little too optimistic a little too quickly. As you know, the cornerstone of
my investment approach is to be wary of extremes and to look for reversion to
the mean. That reversion may come sooner than we think.

For one thing, while the intermediate term indicators are looking good and
the major market indexes are back above their 200 day EMAs, this market is ST
overbought. And our inverse sentiment indicator for the tech stocks, the VXN,
is both ST oversold, at the bottom of its ST regression channel, and sitting
on a ST Fibonacci time line with an implied reversal to the upside (down for
the stocks).

For another thing, even as I write this, reports are coming in from Saudi
Arabia that Al Queda has attacked a compound housing oil industry employees
and their families. Several dead and some 50 or so taken hostage, including
Americans. If it's as bad as it sounds at first blush, the easing in oil
prices we saw last week could come to a screeching halt, and the market rally
with it.

With the markets being closed on Monday for the holiday, traders will have an
extra day to stew about such things. The upshot is that we'll see soon enough
just how legitimate our market bounce really is.

(THE REMAINDER OF THIS LETTER IS RESERVED FOR SUBSCRIBERS)

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