Monday, November 29, 2004


Contrary Opinion - Today's 100-point loss on the DJIA (probably short-term, year-end profit-taking) is the result of the Overbought state of the Fall runup as reflected in many of our Sentiment Indicators. The most egregious is the ISE Call/Put extreme of 2.25, as well as relatively high levels of the CBOE Equity put/call ratio, the Investor's Intelligence survey of 57% Bulls, and the toppy level of the Bullish percent chart (number of stocks on a Buy signal). That said, there are some Intermediate Term reasons for a continued rally around year-end, if we can analyze them one by one, separating the heuristics from the rational ones: Microsoft's $3 dividend on Dec.2 will be reinvested by Institutions back into other stocks (@$34B). There are lots of losses from this years ho-hum market to be bought in for the Santa Claus/January Effect cycle; M2, corporate cash, and other measures show lots of liquidity although profits and the Economy doesn't forecast too strongly. The Dow's dividend yield is approaching a multi-year high of $4, and Specialist shorting is quiescent. One of the most reliable of sentiment indicators - the Rydex Fynd's Nova versus Ursa ratio (calling 19 of 20 market turns since 2000) is well off its lows at 39, but just as with other Indicators, the levels are only signs of warnings that are not to be acted upon until they have reversed meaningfully. And don't forget the perfect record provided by the 5th year of the Decennial Cycle (11 samples).

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