My biggest worry: the bond market

We have to start with what has been our biggest worry recently and that is the BOND
. Please note that both the 30 year and the 10 year have broke out to new highs as the BOND MARKET continues to break down. We bring this up for several
reasons Firstly…and we think most important…NO ONE IS WORRIED ABOUT THIS. In fact, we are finding most say it is a good thing if long-term rates go higher. Secondly, we are incensed that there is not a day that goes by that another FEDHEAD comes out and states that there is no inflation and that everything is perfect. We did not know the FED was supposed to be a mouthpiece on a daily basis. Do not worry that
GOLD, SILVER, COPPER, STEEL, ALUMINUM, OIL, PLATINUM, PALLADIUM and others are at multi-decade highs. Do not worry about the rising costs of everything you pay for. According to the FED, there is no inflation. We will simply let the BOND MARKET become the final arbiter on inflation…as it always has. We understand that rates are still low on a relative basis…but we are watching the direction closely. Hand in hand with this is the ugly action in the UTILITIES…which topped out in October and are now trading below all moving averages. In the past, markets topped out 6-9 months after UTILITIES…but will let the rest of the market decide before we go there.

Hand in hand with the BOND MARKET should be the REITS…but up until the last few days, REITS had been doing fine. We think the BOND MARKET is finally starting to catch up with them and would step lightly in the group. We are seeing several names breaking support as well as moving
averages like GGP, HIW and SPG. These stocks have had a huge run over the past few years and are due. We are also noticing money market funds paying more than the average
REIT’s dividend at this time…food for thought.

There is no doubt the “market” has been acting just fine…but corrections start because of investor’s conditioned sense that nothing can go wrong. We have news for them, corrections do occur. Here are some things we are seeing.

We believe the leading small-caps and mid-caps are ready to pull back into their moving averages. This is not a bad thing. This is normal. Notice how on 12/12/05 ,2/1/06 and 3/3/06 found the RUSSELL 2000 extended from the 50 day average…and every time, pulled back into it. We think there is a good chance that is going to happen now…which means 738. At this point it is no biggie but be aware that these areas have been outperforming for years. The same goes for the SMALL-CAP 600 where the 50 day is down at

All other major indices are trading above moving averages…which is a positive but think there is some corrective work here also. Pay attention first to the 50 day averages which are DOW 11060, S&P 1288, NASDAQ 2298 and NDX 1682. We dont have to tell you about further support just yet but if we start to see distribution, you will know about them. The good news on Friday was that volume was light on the day…but one cannot be thrilled with the overall action. We say this because Friday’s action was a negative reversal day. Not only did the market reverse, but it closed below the day before. All this is short term talk…but it matters.

The lagging SOX failed right near the 50 day average after trying to turn up. This group is all over the place. You have names like KLAC which is trading horribly and below all support but on the other end, SLAB has been monstrously strong. With this failure, we would be very wary…especially as we enter earning’s season. 

GOLD/SILVER/STEEL and other COMMODITIES have moved parabolically in the past few weeks. Please keep a cool head and let them all pull back. Bull markets are made up of corrections to get rid of the weak sisters before turning up again. All these areas need time and work at this point in time. For example: Take a look at STLD and NUE in the STEEL sector. This type of move cannot continue.

The OILS started a near-term pullback on Friday. We love the stronger names like DO and FTO but only on a pullback. We would stay away from the weaker names in the group like APA and SGY as their relative strength is way below the norm in the group. 

BIOTECHS are completely rolling over. It doesn’t take a rocket scientist to look at the chart of
BBH, DNA, AMGN, GENZ and that’s the famous names. We would avoid this group and look to sell on any light volume bounces. If anything changes, we will let you know. 

The TRANSPORTS continue to lead but again, the RAILS and the AIRLINES have become very extended and in dire need of pullbacks. We suspect we are going to get some. Patience is key in this area that is still in a bull market. For example: BNI and UNP are classic examples of stocks that need some corrective work in the RAIL group.

All in all, we really believe it is time to take a step back and relax. At the very least, we are not finding many strong bases to buy off of here. Most leading stocks and sectors feel like they are going to correct. These are the areas we will look at on any pullbacks. We want to reiterate. Bull markets have corrections…some that last days, some that last weeks…and some that last longer. Corrections serve an important purpose. They wipe the smiles off the
bull’s faces and embolden the bears before moving higher.

We will be watching to see if any leading names break down, if any leading sectors break down, if any major index breaks support and if overall distribution find its way into the market. So far…absolutely no biggie.

Gary Kaltbaum