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June 06, 2005

Rally Over?
by Charles Meek

Dow Jones Industrial Average   10,461
Value Line Arithmetic Index   1761
30-Year Treasury Index   4.28%

The Big Picture for Stocks
The 4-year cycle would have the bear market persisting into 2006.

Technical Trendicator (1-4 month trend):
Stock Prices   Down
Bond Prices   Down

It looks like to me that the rally in stocks is about over. We are overbought on the trend indicators and the sentiment indicators. Friday's downdraft may have broken the uptrend. Thus the Technical Trendicator buy signal of April 25 is cancelled.

Accordingly, I am adding a short sale to the Special Situations list. Sell the SPDRS - the S&P tracking stock (SPY, 120.15) at the market opening Monday. Also place a limit order to sell short the S&P SmallCap iShares (IJR, 161.08) at a limit of 161.90. I doubt the market will just tank here. More likely it will back and fill for awhile. If the market does move on to new rally highs, we will get more aggressive on the short side.

I note that long treasuries had a "one-day reversal" on Friday. You can see this pattern best on a candlestick chart, where it is called a "hammer." (A hammer occurs at the bottom of a chart move. The mirror image, which occurs at tops, is called a "shooting star.") Reference the accompanying chart of the 30-Year T-Bond Yield ($TYX). Friday's action showed a long "tail." The thin vertical line defines the range for the day, the tail being that portion of the day's range below the white box. The white box defines the open and close. The fact that the box is white indicates that the close is the top of the box (rather than the bottom of the box, which would be the case if the box were black). This pattern is most often a sign of a trend change, at least for awhile. So it is likely that rates on long bonds will trend up for a time. This could be hurtful to interest sensitive stocks, for example, homebuilders.

I would note that during the drop in long rates recently (rally in prices), short rates have persistently been moving up. This is further confirmation that the rally in long bond prices may be have been a temporary thing. And as noted in previous newsletters, the sentiment indicators for bonds show too much bullish enthusiasm to sustain a rally in prices.

Regards,

Charles Meek
MeekMarketModels.com

Mr. Meek is a Registered Investment Advisor and editor of MeekMarketModels.com.

MeekMarketModels does not guarantee the accuracy or completeness of this report, nor do they assume any liability for any loss that may result from reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice and are for general information only . In making any investment decision, you will rely on your own review and examination of the facts and the records relating to such investments. Trading the market is extremely risky. Our suggestions are often very speculative and not suitable for many investors. Past results are not indicative of future returns. Meek Market Models, Inc.

Copyright © 2004-2006 Charles Meek

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