Why Pros Never Short a Dull Market

Never short a dull market . . . is an old saying; so even though stochastic readings were so overbought after all last week's upside, we have been warning that while the immediate testing efforts against the highs of the prior week was a bit optimistic for a projected intraweek rebound, we were nevertheless not willing to give up on bounce-back efforts, that in ideal fashion would be (at minimum) something like a corrective 'B' wave within an 'A-B-C' correction (maybe even better), after which we (in a perfect world) would proceed to higher highs. (Stayed tuned to daily details on how it goes.)

It's been a bit dicey, for a number of reasons, but we didn't give up on early moribund types of activity that dominated much of the week's start as that's often when markets complete a reaccumulation (remember those specialists and market makers that very clearly needed a pullback to offset inventory they had to feed out in the prior upside?) amidst what seems dreary activity. We were quite encouraged by the market's close on Wednesday, despite the trimming of the S&P at day's end, and incidentally that's also despite Qualcomm's (QCOM) announcement (a stock we never cared for very much, and have said so over recent years) that drove it down about 5, and pared the rally in the S&P in Globex activity. (Cellular & CELEC interest all along was minimal.)

Generally there are some very optimistic enthusiasts (more so than us) who think in terms of there being no more pullbacks, and onward and upward without interruption. Well, we'd love that too, but besides one day at a time for trading guidelines, there do remain several factors (such as foreign business and demand slowdowns along with increased energy costs) that weigh-in on presumptions about uninterrupted robust or parabolic affairs. So we think the markets work higher, but fighting fundamental near-term considerations, and in a sense this becomes the climbing of a 'wall of worry'.

Now maybe some of those worries gel as the year blossoms; especially this Summer. But that's also why we say one day at a time for trading, and a focus on not chasing the breakouts. And that's why the primary interest was buying when most investors were licking their wounds during the earlier March pummeling; an orthodox if belated climax (the market could have used some earlier stimulation, but talk to Mr. G about that), and then again just earlier this week, when the market pulled back so sharply. And besides, as regards the pullback we expected from last week's intervention at a very smart point technically (over 1200 in the June S&P, as postulated an ideal point to do so for some weeks), what in the world did investors expect from NASDAQ after that sharp run-up. Wasn't something like 30% in just ten days sufficient? We'll take it.

Also interesting, is the speculation about whether it's the largest non-financial stocks in the NASDAQ, known as the Nasdaq 100 (NDX), which are contributing to leading the market higher, along with a few players in theSemiconductor Index (SOX), and occasionally a few Drugs and Oils (a combination overall, that cannot endure for a terribly long period of time, we'd think). For over a month we've argued that defensive plays were being embraced at particularly the wrong time, and (not only leadership in techs would prevail, but) that slowing demand overseas would crimp results of a slew of multinational big-caps more so than it would hurt domestic-centric technologies.

In any event though, in our view the likelihood of a decent intraweek rally in the works existed going into Wednesday was there Tuesday night, even if it proved somewhat illusive as far as surmounting prior highs in the way outlined in our technical sector's discussion over the near term (updated later on in tonight's DB). It will be fairly key to see how the QCOM selling psychologically is addressed by other stocks and groups in the a.m., though again that's one of the companies heavily involved abroad, and is tied to bets on specific wireless options, more than are other players. We think it will be well-absorbed. Also, yesterday's story about AT&T's (T) partner in Japan being late with deliveries of reliable systems and software to 'T' over here, squirrels urgent plans of more than one telco expecting faster rollout of 3G than we've thought likely. Our thinking was very slowly; something like 2003-'04 in that area (beyond the WAP or 2.5 implementations that are not garnering a huge following, just as we expected), with only one Company really positioned for 3G now, but struggling with its finances.

Daily action . . . for readers on-guard for a rebound; saw Wednesday become what we wanted; a terrific day. For the hotline (900.933.GENE) S&P players; even better. That's as we caught very good theoretical guidelines twice (the only two efforts of the session incidentally) in the June S&P, generating a 500 point gain or better, and an ongoing 1200 point gain; effectively something to anticipate further upside Thursday.

Technically; Bits & Bytes: and Economic News: (all are reserved for subscribers.)

(Target levels for this move, a pullback and next goal reserved.) Thus we were open-minded towards an early low-point on Wednesday, though clearly there was some element of shock among permabears Wednesday; little enthusiasm in the day's trade for pushing the market much higher (thus the late trimming), and the consequences of worries as outlined last night, that may become a greater concern as time goes on. Besides all the energy concerns, as outlined in the last Letter, there is the specter of disease risk working its way through the industrial 'food chain' later this year, and that (if one does need a worry) probably takes the cake (or should we say 'where's the beef') should in a sad progression, Europe's woes in that area make it to our shores. As it is, they are counting on uncontaminated U.S. food supplies; as is Asia. And as we outlined before, if it hits here; the impact on so-called defensive stocks would be more than considerable, as in many cases (processors, transporters, groceries, etc.) those are sectors many have recently bought-into; something making scant sense in this 'rare' situation; though many money managers continue focused on such areas.

Meanwhile, it's not out-of-the-question that the overall preceding decline was so 'well-done' that these (along with energy concerns) are the kinds of considerations one will contemplate, when knowing that the Fed's monetary policy (etc.) is on the side of an-otherwise-normal preparation for renewed growth. The Fed does not know whether a Summer of dilemmas is forthcoming (balance of this discussion is reserved).

In the meantime, T-Bonds have been trying to put-in some sort of shorter-term low; a very interesting prospect given that even the weeklies are becoming oversold. But, it is still debatable whether any rally back to the 102-104 area would be within a climate of downtrending long bonds (higher yields in the face of a prospective economic turn back to the upside), with more time needed to ascertain whether something of a more bullish pattern could evolve. (Discussion of evaluating pattern reserved for readers.)

For the Dollar Index, impacted more by foreign relativity considerations, the pattern is clearly stable though just below a daily-basis 'mean'. (Technical balance reserved, as are comments on the Nasdaq 100 (NDX)and Semiconductor (SOX) patterns.)

In summary. . . early week reversing in a turnaround Wednesday effort, but besides expected to be a crucial short-term interim rebound; as outlined in tonight's and last night's remarks. Further-out longer-term, we remain mostly optimistic; though are a bit concerned about interim factors this year that could become lids on advances, if not spoilers in theory; but that will depend on (outlined) factors to be assessed later.

McClellan Oscillator data is consolidating a bit; working off near +100 readings for the NYSE, down to +19 yesterday (noted as a nominal +1 change that may again suggest a rally try, which we sure got), and is now around +71, and about +45 for the NASDAQ (after a nominal +5 change for that market). We expected both markets to work higher over time, view periodic corrections along the way as ongoing (likely to be interrupted by ongoing midweek rebound tries). By all means we view subsequent efforts to take the market over short-term resistance as crucial, down the road a bit; but at the moment the proximity of the recent breakout (as support) remains a focus, potentially after this rebound, which could attack short-term resistance (as outlined).

For now, the 900.933.GENE hotline remains long June S&P guidelines (essentially seamless from 1215 daily), and contemplating holding (or scalpers long newly again into new nervous weakness maybe briefly early Thursday morning, but not blindly or in any way without discipline. We're looking for more upside overall, but as noted late last week, some pullback was appropriate first (respecting other factors in play); and it may be in stages. So let's continue pleased to have encouraged not chasing at all the forecast rebound of the preceding weeks, allowing markets to ebb-and-flow in a hoped-for fairly robust structural manner, and firm expectations of the Wednesday renewed upside effort. We'd like to see a newly defensive tone (in awhile); and may need to if this move halts shy of roughly 1250 or so. As of 8:20 p.m. ET, Globex S&P premium's around 16 with futures down about 300 from the regular 1232 close.