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2006-10-04 :: Big Day in the Markets

For the first time in several sessions, everything was working in the markets.  Lately, the Dow has been moving up, but the rest of the market has been left behind.  Today, energy and Nasdaq led the charge higher, with the Dow stocks following along.

We’ve been busy realigning portfolios to meet our revised investment strategy.  As has been our plan, we’ve been selling energy companies into market strength.  With the proceeds, we’ve been adding to non-semiconductor Nasdaq stocks, financials, and healthcare. 

Over the past 4 years, the energy sector has made our clients a lot of money.  During the 6 1/2 years that the Dow went from current levels, down 30% and back to current levels, our clients have experienced significant growth, some nearly doubling their account size.  This year has been tough as the leadership of the energy sector, in spite of stronger earnings than other sectors, has been down.  Unfortunately, that is the way the market works some times.

When we have times like this that requires a change in directions,  it is a pretty monumental task.  First, you have to be sure that the tide has truly turned.  You don’t want to incur brokerage costs to change positions only to realize later that the original assets were the proper investments for the time.  So, you have to be sure that the shift is warranted and that you time the changes so that you are selling/buying in a measured and organized manner.  All of this takes time and patience.

We are getting very close to being re-positioned for the future.  There will likely be some more sales and reinvestments in coming days, as the market affords opportunities.  The chart above shows that the Dow is currently in overbought territory, so we should expect a short-term pullback at some point as people begin to lock in short-term profits on large cap stocks.  That will present additional buying opportunities for us in re-positioning the portfolios. 

The most concerning thing about the Dow making new highs is that the Dow Transportation Index is stuck well below its earlier highs of the year.  Dow Theory says that a new high in the Dow Industrials has to occur in conjunction with a new high in the Transportation index for it to be sustainable and indicative of a strong bull market.  If that does not happen, then its likely a head fake that draws money off the sidelines only to see the market fall back to lower levels.    Dow Theory is not perfect (it is a theory after all), but it is certainly something to watch, and indicates that all new purchases should have trailing stops underneath to protect against the head fake.

In upcoming posts, I’ll discuss the companies that we are investing in for the coming months.  I’ll also talk about our selective use of stop losses and targeted sales prices.

More later!

Mark