The Easy Money Has Been Made–Here’s My Take On This Market

The equity markets posted their best week of 2005,
as stocks were able to move higher in a very broad-based move.  The catalyst for
the advance was tame inflation data, which once again caused many to believe
that the Fed could stop hiking rates.  In addition, there were several bullish
analyst sales calls on the market, which further propelled stocks higher.  The
prior week’s trend of Technology shares outperforming continued, with Chip
shares especially strong.  Even Industrial/Cyclical shares were able to bounce,
as worries of an imminent recession seemed to fade. 

The June SP 500 futures closed out the week with a gain of +33.50 points, while
the Dow futures posted a same relative gain of +325 points, with both more than
reversing last week’s bleed.  On a weekly basis, the ES settled back above its
10-week and 40-week MAs, and right at its 62% Fib retracement of this year’s
slide.  Looking at the daily chart, the contract posted a market structure high
with a small hanging man, but is still holding its 100-day MA.  The YM posted a
weekly bullish engulfing line to break both its 10-week and 40-week MAs, and
settled right at its 50% Fib retracement of this year’s slide.  The contract
finished the week with a market structure high and hanging man.  For you daily
3-Line Break followers, the ES remains long with a Break Price of 1175.75, while
the YM is long with a Break Price of 10158.



Despite the
plethora of reasons cited for last week’s gains, I feel that much of the
strength boiled down to basic supply and demand.  In last week’s comments, I
noted how the Tech sector remained heavily shorted, which clearly had to be
behind some of the gains in the last five days It wasn’t just Tech either, as
many other sectors had record short positions as well.  In fact, just over a
week ago the Wall Street Journal reported that short interest on both the NASDAQ
Composite and NYSE were at new all-time highs.  These stats from the Journal
didn’t even include the high number of puts outstanding per the Put/Call Ratio. 
Also, open interest has been decreasing in the equity index futures, implying
that those who were bullish have been taking profits into the recent rise.  I
can say with a fair amount of certainty that bearish players reversing their
bets had a lot to do with the recent gains.


What we
also haven’t seen is consistent high volume, which also suggests that
institutions may not be putting much money to work yet.  Until we start seeing
higher volume confirm the gains, it’s difficult to believe the current strength
is anything more than the long-awaited oversold rally that the talking heads
were looking for in March and April.  This doesn’t mean I’m gonna become a
grizzly bear (if you’re gonna be a bear, be a grizzly) quite yet, but the easy
money on the upside has likely been made. 



Please feel free to email me with any questions
you might have, and have a great trading week!