October 23rd, 2005

I must be in good company because most

I must be in good company because most of the commentary I heard or read since the market closed Friday is that no one can make any sense of the market’s near term direction. People who have played the market for 30 years say this is the toughest market since the 70’s (the last century, that is).

While the fundamentals look desparate what with the high price of energy, no signs that the Fed is getting any smarter, continually increasing budget deficits … you’ve heard the litany elsewhere. Here’s what some other blogs are saying now:

Freestyle Daytrader blog: “….beginning April 30th, 2006, the following 6 months (4th Year of a 4-Yr Cycle) have historically returned a negative 2.52%. If there is ever a time to be out of the market, this is it.”

Technicator blog: “What to expect next week? Well, a lot of the energy stocks are reporting next week, the second week of Q3 earnings season. I am speculating that there will be whipsaw action like we saw last week. There is more upside at Nasdaq and more downside in the Dow Jones. It looks like coming into the weekend, the two are running in opposite direction (nasdaq bullish and dow bearish) with the Dow with a bit more strength.”

The Big Picture: “The last time the New York Stock Exchange short interest ratio broke below a key trendline, the U.S. equity market had a short and sharp selloff — one that was later followed by a major upside blow-off ….On the basis of monthly short interest data for the period ending October 14th and average daily volume for the first two weeks of the month, the most recent SI reported works out to approximately 4.74 days.” That is the lowest level since January 2004. This places a measure below a major uptrend dating back to the September 2001 lows.”

The Kirk Report: “The take away from this week is that the vast majority of investors are taking a defensive & mostly bearish stance, although more than two-thirds of companies who have reported their 3Q earnings have surpassed analysts’ estimates. As we saw last night, a few beat their target with some gusto – just look at Google (GOOG), SanDisk (SNDK), & Broadcom (BRCM). If we’re going to see that 4Q rally so many expect, we must see more leadership and rotation into the technology space. Still, with every day we continue to see small signs that on balance indicate the right move is to put money to work. Now that the current debate is whether we’re going to crash soon is making the rounds, I’m getting more interested about stocks than I’ve been since last April. And, that is the bottom line. “

And my opinion? Last Wednesday I posted here a list of short candidates from past IBD100 lists and during the week I took small short positions in a couple of real estate and energy stocks. But my watchlist of stocks about to make upside breakouts continues to grow. If and when the market makes it’s move, I’ll have more things to buy than I have cash to invest! On the contrary, these all might just be stocks that have bumped into ceilings from which they will take dizzy falls. Here are a few examples not previously mentioned here.

Alliance Capital (AC) survived a scandal earlier in the year and has since built a consolidation channel with the top at around 48 and the bottom at 43.5:

The upward slopping trendline is one that AC has been true to ever since it first started trading in 1988. A move back down to low-40’s from the current 47.75 awaiting the upward slopping trendline to catch up sounds reasonable but a move through the top of the channel to attack the previous all-time high of 54 also seems feasible.

Starbucks (SBUX) is another favorite long-time favoriate that’s approaching the top of a long-term channel it’s been stuck in since the beginning of 2005.

The upper end of the channel is at 56 and the lower end at 45.50. Will it ultimately break through the resistance and also attack it’s all-time high of just above 64.

And finally, what about some of the regional banks. Wilmington Trust is only one of many with similar patterns: As the Fed was tightening credit and raising short term rates, these smaller regional banks have been bump against ceiling resistance levels. For Wilmington Trust, that ceiling is around 39. Will they begin moving up again after Greenspan retires and, perhaps, interest rates plateau?

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