The market is bullish but wait for a better entry
The major
indexes started 2006 off in an impressive fashion, with solid gains supported by
robust market internals seen each day. The catalyst for the gains, according to
the talking heads, seemed to be Tuesday’s Fed Minutes, which were interpreted as
suggesting that Fed’s rate hikes were close to being done. However, it was
likely the combination of normal new year inflows into retirement plans and the
unwinding of ETF-based short bets from late 2005 that spurred stocks higher.
Keep in mind that many hedge funds likely shorted ETFs
in order to become more market neutral and lock in their performance ahead of
year-end. Consequently, when the new year kicked off with strong gains,
these funds likely covered these short positions in a bit of a panic. With
that said, the gains we saw were probably a bit artificial to some degree.
But, it was very nice to see Technology shares paving the way higher again.
The week’s
gains were powerful enough to allow the S&P 500, NASDAQ Composite and Russell
2000 to all post breakouts. These indexes finished at fresh multi-year
highs, which from a technical standpoint was quite a bullish development.
In hindsight (it is 20/20 you know), the pause in late December ended up serving
as a nice base for the current gains. While the recent market has been
quite bullish, I did have the feeling late Friday that conditions were becoming
a bit too euphoric. Because of the possible artificial form of stimulus
driving stocks, it’s probably not a good idea to chase equities higher at this
point. The NASDAQ Composite alone was up 4.5% during the holiday-shortened
week alone. There is no doubt that equities could continue to move higher,
but as such, I would favor using patience and waiting for better long entry
points.
Please feel free to email me with any questions
you might have, and have a great trading week!
Chris Curran
Chris Curran started his trading career at the age of 22
with a national brokerage firm. He combines fundamentals and technicals to get
the big picture on the market. Chris has been trading for 15 years, starting
full time in 1997, and has never had a losing year as a full-time trader.