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Sunday, February 24, 2002

Last week, I said that I didn't have a forecast for the coming week and it may be best to simply sit back and wait for the market to tell us what to do.  We were getting many conflicting readings, and the games from option expiration played havoc with some of our indicators, seemingly more than usual.  We were fairly inactive last week (more inactive than we should have been it turns out, but you should have received an email about that), but the good thing is we avoided the extreme chop and actually showed a profit for the week.

Let's take a look at where we stand today:


BULLISH

*  The CBOE put/call ratio has been persistently high for several days on end.  If you look at some of the moving averages, you can see that a large number of puts have been trading over the past two weeks.  That's a sign we don't see very much, as many options traders will only buy calls.  As hard as that is to believe, it's very true that most investors and even traders have a bullish bias and will not, for whatever reason, buy put options.  Many professionals don't put much weight in the put/call ratio, but when it becomes extreme it is a fantastic indicator.  The moving averages are now becoming extreme, and I think that puts some support under the market.

*  Most of the sentiment surveys are becoming quite bearish.  We have some trouble with Investor's Intelligence (which is one of my favorites), but the others are giving some pretty low readings.

*  We're finally getting some movement out of the VIX.  It's been to the top of its range a couple of times over the past weeks, but quickly settled back down.  I would like to see a little explosion out of this range before giving it much weight.

*  We're seeing consistently high readings from the STEM model.  They are not quite extreme enough to give a BUY signal, but they've been very persistent.  That's fairly typical of 1)an extreme shock and market crash ala September 11 or 2)a steady drip down that goes on seemingly forever.  Unless we get some exogenous event that sends a shock through the market, I think it's pretty obvious we're suffering from #2.  Those types of cases typically end in a fairly quick selling panic, but we haven't seen anything like that yet.  These readings, though, are building up for something that could be big.


BEARISH

*  Commercial traders (mutual funds, pension funds, etc.) increased their net short position in the latest week, while small speculators increased their net long positions.  This is the second week in a row this has happened, and it is not a positive trend.

*  We've had no type of quick selling panic.  It looked like we might get one a couple of times last week, but we're just not quite there.  Some of the selling was extremely heavy, but it just doesn't seem finished to me.  Call that one a gut feeling.

*  The VIX calms down much too quickly.  I know it seems contradictory to have the VIX in the both the bullish and bearish camps, but its behavior merits that.  If the VIX could go the top of its range and at least stay there, that would be one thing.  But on every rally, no matter how minor, it drops right back down to the lower end of its trading range.  We need some kind of explosion upward out of its trading range to become really bullish.

*  There has been a large money shift into bonds.  The 10-year Treasury bond rallied up to its previous resistance, and even eclipsed it by a bit on Friday.  This shows that large investors are going to the safety of Treasuries as opposed to the stock market.  If bonds rally much further, it could spell real trouble for stocks.  The one saving grace of this shift is that as bonds rally, interest rates come down.  When rates get low enough, stocks become attractive again because of valuation and also because of the yield differential.

*  We keep getting more and more accounting issues, and it's just not going away.  Enron is now a joke, but JP Morgan and some of the other ancillaries are not.  This thing is a virus, and it's spreading to some blue chips.  If a company comes out and announces "issues" with its accounting and the stock doesn't drop much, that would be a sign we may finally be over the panic of the situation.

Again this week, we don't have a very clear picture with which to work.  I would still like to see a drop to the 1050 area accompanied by a little selling panic.  I'm not so sure we'll get to see that this week, but I just don't have a lot of faith in the rallies we're seeing lately.  I don't think we can go appreciably higher before going lower first.  We'll play it by ear yet again this week and hopefully escape richer than last.