shamsaee, i am mostly concentrating on sentiment analysis...therefore, i have definitely NOT been bullish during Q1...i did play the long side in the incredible speculation that gripped the Bulletin Board in the first quarter, but i constantly warned people that the party was going to end soon...and it did. the week ending April 14 was the most profitable trading week for me EVER incidentally. the reason why i am cautioning people not to get carried away by this rally (although it may last a while, for the aforementioned reasons, end-of-quarter, triple witch squaring and deeply oversold conditions in many stocks) is still the same: sentiment is way too bullish and complacent. one of my favorite indicators, the Rydex ratio, which measures bull vs. bear fund allocations within the Rydex fund family shows that 87% of assets are deployed to the long side, and in view of today's rally the measure will be in danger of falling back to its all time low of 0,08 that was recorded at the March top. this measure is raising a big red flag...the same goes for the put/call ratios, which have flipped from the mid-range to extremely low readings in the space of three days. two days ago the OEX p/c ratio had its lowest one day reading since 1988 (that's how far back my data go).
at the same time, completely ignored by the equity markets, there's a liquidity crunch in the credit markets, with spreads blowing out to record levels...this signifies that a crisis of confidence has gripped the credit markets, as defaults accelerate in the face of a strong economy...the credit markets apparently fear a massive debt wipe-out should the economy slow down or God forbid, fall into recession.
invariably a crisis of confidence in the credit markets worms its way into the stock market with a slight delay...it has done so in the summer of '98, in the first quarter of this year, and will likely do so again.
the S&P index, which is a good proxy for the big cap bubble due to its cap weighting (it represents 77% of total US market cap, with the top 150 cos. representing the bulk of that) is now higher than when the rate hike cycle began...it does not yet reflect the higher rates, nor does it reflect the increasing pressure on corporate margins due to the combination of sharply rising input costs and slowing growth down the road.
so i'm really weighing a combination of technical and fundamental factors here, and my conclusion is that although we have a shot at a playable ST rally here, over the medium to longer term the risks are far greater than the potential rewards.
regards,
hb |
