History Lesson

History
tells us that we will experience a retest of the July 24 lows.

Every significant market bottom, from the 1970s through the
1990s, has had one. This means we could
see a nasty retracement anytime soon, one that would take us all the way back
down — or nearly all the way back down — to the July lows.
Thirty days (from July 24) and over 20% up (from the low) put this market
well within the time/ price windows of previous retests.

The technicals have been solid so far. Breadth,
volume, momentum, and the penetration of key resistance levels all suggest we
are witnessing an important and possibly even primary market bottom.
We have also seen a relative out-performance by the Nasdaq market in the
past few weeks (see chart). The Nasdaq
traditionally leads at turns in the market, both up and down. 

Balancing this upbeat outlook are the bearish arguments, which currently
center on poor fundamental valuations. I
agree with these arguments; it doesn’t take a genius to figure out that PEs
and dividend yields are at levels normally associated with stock market tops,
not bottoms.  However, these are
longer-term issues, and for now we have the present to think of.

In my
nightly service
, we are long the Oil Service HOLDRs
(
OIH |
Quote |
Chart |
News |
PowerRating)
and the U.K. iShares
(
EWU |
Quote |
Chart |
News |
PowerRating)
,
with tight stops. If the market decides
to mount its traditional retest phase beginning next week, then so be it —
I’m wearing protection!  Not only
that, but I’m staying out of individual shares, which can implode
spontaneously at the faintest hint of an accounting scandal or other types of
Enron-ish news. Barring extraordinarily
negative action in the averages — such as a couple of high-volume closes
beneath the August 5 lows — I will view any substantial retracement as another
buying opportunity.

Have a safe weekend.

Dan