Characteristics Of A Market Top

We are big believers in
one very important credo when it comes to the market
…ANYTHING CAN
HAPPEN. Knowing that, our job is to interpret market conditions at all times. We
read the market because we believe fear and greed will always be prevalent no
matter what decade we are in. The bottom line is to make sure you are not
fearful when you should be greedy and more importantly, greedy when you should
be fearful. Unfortunately, the masses always get it wrong at at the extremes.
Cases in point…all the giddiness during the late 99/early 2000 period and the
paralyzing fear at the Oct 02 and March 03 lows. That’s why we have tunnel
vision. We do only what the market tells us to do. Yes, we believe the market
talks…and it does it with its chart patterns…and if you don’t listen, you
will ultimately pay a stiff price.

We are bringing this all up right now because for
the past 3 months, we have been walking you through a process of topping in the
market…AND UNTIL SOMETHING CHANGES, we are going to continue to look at things
that way. As we have told you, the market never rings a bell at the lows…and
more importantly, at the tops. Tops take time…and when the market ultimately
caves, it is only because the average stock has already been clonked. During
this time, money flows into bigger cap names, masking the deterioration
underneath the surface. BUT…ultimately, by force, the market can’t hold up
under the weight of deteriorating internals. Most people are scratching their
heads at this point because ALL THE NEWS IS GOOD. That leads me to another
point. MARKETS DO NOT TOP ON BAD NEWS. THEY TOP WHILE ALL THE NEWS CONTINUES TO
BE POSITIVE.

During the past three months, all the earnings
reports have been fantastic. All of the economic numbers show the economy is
sizzling. Mergers are prevalent again. Bonuses on Wall Street are up. Analysts
have smiles on their faces. Get the hint!

In the past 3 months, we have identified
SEMICONDUCTORS, REITS, MORTGAGE-RELATED, INTEREST-RATE SENSITIVE, HOMEBUILDERS,
GOLD, COMMODITIES, BOND FUNDS, BONDS and sundry other areas as topping out. They
have obliged us. But the major indices have hardly budged. Maybe…just maybe,
that will change. We also told you to get off margin, raise the bar, raise some
cash and be more defensive. We also told you we are in the late innings of this
bull move.

My headlights do not go far out. The only thing I
know right now is that this market, if it wanted to, can cave very easily. On
Wednesday, major indices broke their shorter-term 50 day moving
averages…again. Of note, these moving averages are now on the decline, not
incline. Time to look at support levels, that if broken, will tell us, in fact,
things are getting worse.

The DOW at 10,250…no support after that until
10,007.

The S&P 500…1116 and then more importantly,
1087.

The NASDAQ at 1973 and more importantly at 1897.

The SOX has already broke the longer-term 200 day
average with next support at 453. It does feel like the SOX may bounce here.

 

It is imperative that these support areas hold. A
break of them and no longer will we be saying we are in the late innings of the
bull move…but the early innings of a bear move. Yes, I said that.

None of this changes your game plan. Keep your
eye on the ball. Any stocks that have tried to break out, have failed. Until
that changes, you must respect the market…or I promise, it will bite. I
believe the next few days will tell a big tale. At the very least, this game is
going to remain quite challenging.

I will be appearing on FOX NEWS CHANNEL this
weekend at 1130 am EDT…on “Cashin In.” I will be handsome and buffed as usual.
Do not forget the whole business block on FOX NEWS CHANNEL between 10 am and
noon EDT on Saturday. Of course, that’s 5-7 am Hawaii time…where I would like
to be.  

Gary Kaltbaum