General Market Update

I used a quote for my weekly MSW analysis from a fund manger from Oppenheimer Capital named Eugene D. Brody: “Sell stocks whenever the market is 30% higher over a year ago”.

The NASDAQ is currently 25% higher than it was in July 2006 and is trading in new high territory (the highest level in six years). Historically, markets retreat after making a 30% gain from one year to another and we must be on the lookout for a signal or a combination of signals and red flags that could lead to a correction or downtrend. I am long the market but I am always aware of market cycles and I will be watching for signals so I am not telling anyone to sell at this time but I am warning all investors to be smart and listen to history.

Like the NASDAQ, both the DOW and S&P 500 have made considerable gains from their lows in 2006. They are both up about 20% and have been riding their 50-day moving averages for the past seven months. The first possible red flag of a trend breakdown would be a major violation of the 50-d moving average among one or all three major indexes. The second major red flag could be the breakdown of the relative strength rating for the DOW or NASDAQ versus the S&P 500. I have highlighted the RS line on the DOW chart with the bottom representing a possible trend reversal and the top of the shaded area representing another leg of the up-trend (a fresh breakout to new all-time highs).

When reading the 2007 Stock Trader’s Almanac, I see that March represents the fifth best month of market gains over the past 100 years but has been volatile in the latest decade with large gains and losses. March has had a gain for the past eleven straight pre-election years and that is exactly what we are in right now. Take this with a gain of salt because price and volume is still the most important. The markets also haven’t experienced a down year during a pre-election year over the past 68 years. There hasn’t been a down year in the third year of a presidential term since 1939 (World War Two era). The only severe loss during a pre-election year was in 1931 (the depression) when looking at data than spans to the early 1900’s. During Bush’s last term, the market was 25%, 26% and 50% for the DOW, S&P 500 and NASDAQ respectively. This did happen during the fall of Saddam with the beginning of the Iraq war.

We haven’t had a stretch of strength for the NH-NL ratio as we have witnessed over the past four weeks since 2004 (almost three full years). We have not had three consecutive weeks of new highs averaging 500 or more new highs since 2004 and we didn’t have three out of four weeks with these types of numbers in 2005 or 2006. We had our second best week since December of last year with new highs averaging 556 per day and new lows only reaching an average of 42. I must point out that this was a short week due to the President’s day holiday but the strength must be noted. It was the third time this month that the weekly highs averaged more than 500 per day. February of 2007 has been the strongest month for the NH-NL ratio since early 2004. Is this a sign of things to come or is this a topping signal? I read it as a trend and the trend is higher and until that is violated, we stay long!

Weekly New High – New Low Ratio (NH-NL) for 2007:
Saturday, January 6, 2007: 279-67
Saturday, January 13, 2007: 344-39
Saturday, January 13, 2007: 281-46
Saturday, January 27, 2007: 316-55
Saturday, February 3, 2007: 502-45
Saturday, February 10, 2007: 558-53
Saturday, February 17, 2007: 428-48
Saturday, February 24, 2007: 556-42 – This past week (a short week)