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Reading the RallyRick Ackerman
Thursday's oversold bounce turned into an outright short-squeeze Friday, when stocks rose throughout the session with just one minor correction intraday. Fortunately, there needn't be any confusion or guesswork about what is yet to come, since the thrust brought the Industrial Average to within inches of an important hidden-pivot resistance at 10465.77. The actual hourly high was 10462.26, which means the pivot itself has yet to be tested. For sure, it has the potential to stop what is now the most powerful two-day surge since last October. But if the blue chip average breaks decisively above it, shorts had better run for cover, for that would portend additional upside potential to at least 10756.14 over the near term, handily exceeding late-June's recovery 10656 high. For purposes of determining when the 10465.77 pivot has been decisively breached, let us stipulate that it be exceeded intraday by at least 25 points, or that the index close for two consecutive days above it. Even if this fails to occur and the DJIA is repelled by the pivot, I would infer the implied weakness thereafter would be prelude to another bull charge. (Click on chart to enlarge)
Give Us A Break! My friend Alan Newman, editor of Crosscurrents, thinks that any housing bubble as well-advertised as this one is in no imminent danger of bursting. I somewhat agree, although nothing could convince me that the real estate bust can be indefinitely postponed. Alan is more or less in accord, but thinks we should be paying more attention to another bubble ñ the one involving the stock market. With his kind permission, I have reprinted his latest (July 6) below: Give us a break! Enough already! Is housing the most well advertised "bubble" in human history or what?! You would think by now that anyone with half a brain would have sold their precious abode (or vacation retreat) and rented a handy cave nearby to escape the impending debacle. And thereby hangs our argument. Frankly, we are mightily perplexed. Every day we see an overwhelming torrent of articles and commentary relating to the "real estate and housing bubble" and the expectations of a subsequent collapse but nowhere do we read about the continuation of the greatest stock market mania ever to highlight the foibles and frailties of humankind. Clearly, we remain in gross denial of the mania for stocks while there seems to be no doubt whatsoever that real estate prices have gone as bonkers as Nasdaq in March 2000. The litany of dire warnings has grown to such intensity that the last thing we now expect is a bursting of the surmised housing bubble. If the public had been deluged with similar pronouncements several years ago, we have no doubt the stock market bubble would never have expanded to ludicrous levels. Forewarned is forearmed and for the vast majority of us plain folks, the repetition of dire warnings alone is sufficient to keep us away from lemming like activity. Housing a Necessity There is an incredibly huge difference in how the two asset classes compare. They do not. For the sake of argument, if housing prices did begin to correct (and surely they will at some point), that circumstance is not to be confused with how investors hold their faith with equities. In the case of stocks, they are easily disposed of and the proceeds are available in three days. In fact, equities are so readily sold that speedy declines or even panics are entirely possible. Investors can't eat their stocks, can't live in them nor wear them. Stocks are not a necessity. Housing is. It's not as if we refuse to be cognizant of the risks in owning real estate stocks at this juncture. Many readers may remember that our primary Investment Stance position in 2004 was the Cohen & Steers Realty Majors Fund (ICF), which we closed out on December 6th, up 31.2% for the year. Those shares have risen a further 7% but we have not looked back and are satisfied that we made the right decision. However, there is not the slightest chance that we would short ICF or entertain the notion that we are even close to a peak in housing prices. We've seen far too many consensus blowouts that went in the opposite direction in recent years; the stock mania for one, and in recent months, the expectation that long rates would rise and that the dollar would sink. Sudden Ignorance Plus, given the statistical background, the sudden ignorance shown towards stock price levels is beyond incomprehensible - it is nearly reprehensible. For one thing, the S&P 500, which represents over 80% of the U.S. stock market, is still trading at 20 times earnings, generally acknowledged by history as representing overvaluation on a massive scale. For another thing, dividends remain exceedingly low at 1.86%, a full percentage point below the historical boundary that has typically signified a bear market in progress. Bullishness and complacency is at levels never before seen or perhaps seen only once before. The industry's investment advisors as measured by Investors Intelligence have been bullish without interruption for more than two years. Strategists allocations to stocks have averaged roughly 65%, historically a very high exposure. OTC Bulletin Board trading of the most speculative issues is at a record high, nearly four times as high as before. Margin debt levels are back up to where they were in December 1999, just three short months from the mania's peak. Finally, the cash-to-assets ratio of mutual funds is now down to 4.1%, only 0.1% from the level of March 2000, at the very peak of the stock market madness. And the focus remains on real estate?! Give us a break! "Five years after most of the media cheered on a stock-market mania that blew up with disastrous consequences, journalists seem determined to sound warnings about the overheated real estate market. This time, even as housing prices continue to soar, many are erring on the side of pessimism."- Howard Kurtz, The Washington Post (July 4) *** Taming the Mini-Futures Trading the S&P futures with a stop-loss of one point or less? Come visit our archives to see how it's done. You can get a free one-day pass to visit the site, or a two-week trial subscription with no risk, by clicking here. Rick Ackerman Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers' initials will be used unless express written permission has been granted to the contrary. All Contents ©2005, Rick Ackerman. All Rights Reserved. You can subscribe here. 321gold Inc |
