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2006-07-26 :: S&P Breaks Out to Upside

When I last wrote, I told you about my laptop being fried by lightning.   I finally had time to go to Best Buy to purchase a new one and I was amazed at how cheap they were.  My deceased Dell cost in the $1,800 range when first purchased 3 1/2 years ago.  I purchased a Toshiba with more speed, memory, and significantly storage space for less than 1/3 the price of the Dell.  The forces of Chinese driven deflation seems to be alive and well in the electronics business.  Anyway, I can now write the blog from home and should be able to keep it more current.

I’ve included the chart above so you can see the break out on the S&P 500 Index after yesterday’s second positive day in a row.

You can see where the 50 day moving average crossed the 200 day moving average in a downward trend.  This sort of inflection point, when followed by the index itself moving higher than both indices, is a good indicator that there is pent up bullish sentiment out there just looking for reasons to move the market higher.  IF, and its a big if, the market can stay generally positive as we approach the Fed’s next meeting on interest rates in August, and IF the Fed announces that they are finished raising rates (either concurrent with or instead of a final rate increase) the market should find its catalyst to move back up to its highs for the year.

The sectors that would lead us higher would be the financials, the interest rate sensitive – like home builders that are trading as if no one in the country will ever build another home  – and the cyclicals.  We should also see energy, metals (including gold), and infrastructure move to more realistic valuations that reflect their earnings growth consistency.  We should also see longer duration bonds rally in anticipation of lower rates ahead.

We have built up a roughly 10% cash position department wide, which was our goal.   Some accounts have a bit higher, some a bit lower.   We’ve been adding shares of energy companies that will benefit from this activity and have specific characteristics that improve their outlook for the future – Frontier Oil because of its ability to refine heavy crude; Devon Energy for its vast stores of energy in the US; Grant Prideco, Gardner Denver, DrilQuip, and Helix for their ties to ever-growing drilling industry; Nabors and Noble as drillers themselves.

This chart is the things that market bottoms are made of.  Is it definite? Absolutely not; geopolitical issues could cut its legs out at any time, the Fed could drive the economy into recession from its interest rate hikes, the government could do something stupid, a terror attack could surprise us.  We will maintain our above normal cash position for the forseeable future and layer in longer duration bonds where appropriate.

More later!

Mark