=DJ TECHNICAL VIEW: It's Hard Out Here, Being A Bear By Michael Kahn A Dow Jones Column No, this isn't for you Chicago basketball fans. The stock market bulls this year are the ones defying gravity like Michael Jordan as they push stock prices higher. High oil prices? No problem! An actual increase in the core inflation rate? That just means business is picking up. Saber rattling with a potential nuclear power? That didn't stop the earnings parade. In short, the bulls are shrugging off the bad news and focusing on the good just like they do in a bull market. April was a tease of a month for us bears as the major big stock indexes all flirted with breakdowns before snorting back to life. But technical analysis is more than chart patterns and silly jargon and there are an awful lot of things that don't look that great when we dig down a bit deeper. Readers who have followed my work for the past few months know that I have gotten progressively more bearish over that span of time. Sure, along the way there have been pockets of bullishness to recognize that the market was indeed still rising. There were also a few whipsaws to keep me in my place - subordinate to the market. Now that I have been slapped with the label of perma-bear, let's delve into why I am such a party pooper and perhaps readers will understand my fears. Be sure to put on your big picture hat and think like an active investor, not a short-term trader. This isn't an attack on the system, the economy or anything else other than seeing risk in the market and trying to position a portfolio for capital preservation first and capital gains second. It's great to have earned a lot of coin in the bull market but it's even better to keep it instead of letting it slip away. Let's start with the trend. As April wound down, the trends in all the major market indexes, from the huge stocks of the Dow Jones Industrial Average to the tiny stocks of the Russell 2000, were moving higher. That's good! There is no denying that there was money to be made as a stock investor and there probably still is in select areas. Wait a minute! Select areas? I just said that all the major indexes were moving higher. Since most investors like to get a handle on individual companies and their prospects to provide above-average returns, we have to recognize that not all industry groups in the market are created equal. Some are strong, such as precious metals stocks and, until last week, energy stocks. Some are weak, such as health care and utilities. It absolutely pays to know which sectors are leading and which are lagging. It may be a rising tide but not all boats are seaworthy. That brings us to market breadth and the big change it has undergone recently. The most widely followed gauge of breadth, or how broadly based the current bull market is - the advance-decline line for the New York Stock Exchange - has broken below its own rising trendline. What that means is the dominance of stocks that are going up over stocks that are going down has ended and that only happens when more stocks go down each day on average than go up. The generals in this bull market are leading fewer troops into the battle with the bears. Another measure of market health is the number of stocks hitting 52-week highs each day compared to the numbers hitting new 52-week lows. As the Dow Jones Industrial Average trades at six-year highs and the Russell 2000 moves into record high ground, we would expect to see a healthy portion of new highs. There is nothing mysterious about that. But while we are indeed seeing plenty of stocks at new highs, we are also seeing an equal number of stocks hitting 52-week lows! Let's drive that point home - the market is at new highs and a significant number of stocks are trading at their lowest levels in the past year. That is no way to run a bull market. More technically inclined readers may have seen research on the Hindenburg Omen or other such ominously named indicators. They measure the numbers of new highs and new lows as a percentage of total issues on the NYSE and fire off a dire warning for the overall market when the market gets fractured with lots of new highs and lots of new lows at the same time. This indicator fired several times in April, so, needless to say, the bear in me is stirring. One of the most bandied-about Wall Street saws is, "sell in May and go away," which is a fancy way of saying that the summer months are the least kind for stock market investors. The idea that most of the gains over the decades have occurred in the winter months has been proven statistically so it definitely should be considered. Of course, statistics can be tortured to say anything and even the best analysis of this seasonal phenomenon can come up a loser in any given year. Case in point would be 2003, when the summer months produced a very nice gain to rival the previous and following winters. Statistics don't guarantee results although the do lay the odds. So let's take stock, as it were, in what the indicators are saying. Breadth is faltering. Esoteric indicators are flashing warnings. Seasonal headwinds are now blowing. Let's toss in rising interest rates and an inflationary environment and we've got a recipe for a bear's banquet. Now all we have to do is tell the bulls, who are shrugging off all of this bad stuff. There are a few tricks individual investors can use to help determine when all of these evil chickens are coming home to roost. One of the simplest is just following the progress of the sectors in the market that have been leaders through thick and thin. It isn't the energy sector and it isn't gold, for both of these groups have had their own trials and tribulations over the past year. Could it be housing? No, that's last year's model. Semiconductors? Not even close. In fact, none of the usual suspects are in position now to become that early warning system for investors. Not the Nasdaq. Not even the small-cap indexes like the Russell, although they would qualify as confirming evidence, should they start to break down. What I am watching very closely are the securities brokers and dealers. What other group has fooled us by sporting negative momentum readings and other technical warning signs only to laugh as it ignores them all? In fact, the American Stock Exchange broker/dealer index has outperformed the market for the past decade and picked up its relative pace just about a year ago. True, there have been short-term corrections in relative performance, so if we focus just on the past year we'll see that they haven't lasted very long at all. It has been a relentless advance that has rewarded the believers handsomely and that is why it has my vote as canary in the coal mine and the best sign that all of the bearish evidence is finally starting to take its toll. When this index finally cracks, we will likely see a sea change in the market. So, you go, bulls! Continue to work your magic but please don't make the mistake of thinking that a bull market already three years old is immune to declines. Enjoy those dwindling numbers of sectors that are still going up. Scoff at bears like me, if you like. But even if you think the stream of positive earnings will overpower all the other factors cited here, please at least tweak your portfolio to reduce exposure to sectors that are already going down and cut back on those that have gone up so much that they now constitute a disproportionately high percentage of your holdings. It isn't that you should become a bear because I say so. Rather, it's just common sense to reduce risk and at least consider an exit strategy. When the market finally changes its mind, it will be capable of swift punishment to those who aren't prepared. (Michael Kahn writes the Getting Technical column for Barron's Online, which analyzes sectors and markets twice a week. He publishes the daily "Quick Takes Pro" technical newsletter, and also writes for MarketWatch.) -Michael Kahn; 415-439-6456; AskNewswires@dowjones.com (END) Dow Jones Newswires May 01, 2006 09:34 ET (13:34 GMT)
A moment of silence please as the Amazing Rennick goes into a trance as he stares into the chrystal ball. hmmmmmmmm, ahmmmmmmmmmmmmmm, At the close: Wait,, Rennick see's shopping malls, garden work, and golf courses. The Amazing Rennick see's the Market very quiet and Up 35 points, (give or take 10 points) at the Close. The chrystal ball has told him to go golfing and don't worry about the Market today. ....Rennick will snap out of it in 3 seconds 3-2-1
* PING* Good evening ladies and gentlemen. ES airlines welcomes you and hopes you have enjoyed your stay. We will be flying at an altitude of under 1319 for the rest of the week. Please fasten your seatbelts as we expect further choppiness along with occasional bumps for the rest of the flight until 4/5. Once again thank you for flying ES airlines.
*DING* This is captain volente of the space shuttle short killer. Fasten your seatbelts as we prepare to blast out of this trading range to 1334 depsite of rising interest rates and oil leaving the shorts once again flabbergasted and burned. Houston do will have permisison to lift off ?
Groung control to major volente....your flight has been delayed..... bumpy weather prevents thrusters from going above 1319. Launch rescheduled for Monday 4/8.