Five-Years Man

By Rick Pendergraft

Dear Reader,

You will have to excuse my reference point for the title of this article, but I was a big fan of the Cheech and Chong albums (and yes, I mean actual vinyl albums) when I was a teenager.  While I was never a fan of the herb (I prefer good ole fashion barley and hops), my friends and I got great laughs from the comedic duo’s skits as well as their movies. 

In one of their old skits called “Let’s Make a New Dope Deal,” they parodied the old game show Let’s Make A Deal, except contestants were hoping to win marijuana.  One contestant was making his second appearance on the show and it had been five years since his previous appearance.  When the host ask him what he had been doing for the previous five years, the contestant (played by Tommy Chong) just kept answering “five years.”  After a few frustrating minutes, the host realized that the contestant had been serving five years in prison because he was caught with the pot he won on the show.

So how does this tie into investing?

Over the last few days, I have been researching several sentiment indicators to see the last time we had reached such bearish levels.  The answer kept coming back “five years.”

The first item where the answer is “five years” is the 21-day moving average of the CBOE equity put/call ratio.  This moving average moved above 0.80 on Friday, March 7.  The last time it was this high was in the spring of 2003.  The indicator has been above this level now for several days.  Even the massive rally last Monday did little to keep people from buying puts.

The second indicator that I looked back at was the Investors Intelligence report.  This weekly report surveys investment newsletter advisors and measures the percentage that are bullish, bearish, and neutral.  The most recent report that came out on Wednesday showed that the number of advisors that are bearish (43.6 percent) outnumbered the bullish advisors (31.1 percent).  Can you guess how long it has been since this happened?  You guessed it, five years.

The other item where five years is the answer was the massive rally last Tuesday.  The 416-point gain occurred after the Fed announced their plan to pump another $200 billion into the ailing credit markets.  You probably saw in the headlines that this was the biggest one-day gain for the Dow in five years.

What all of this tells me is that the market is due for a bounce.  I am not talking about a one-day 400-point bounce.  I am talking about a bear-market rally that lasts for a week or two. 

The overall trend is still to the downside, but with the massive amount of pessimism, the oversold conditions we are seeing on almost all stocks, and the Fed getting ready to cut rates yet again, the atmosphere is ripe for a rally.

Good luck and good trading,

Rick

P.S.  To let me know what you thought of today's article, send an e-mail to: feedback@investorsdailyedge.com.

Market Watch

Tuesday is Fat with Economic Reports

By Rick Pendergraft

Everyone will have their eyes on the Fed tomorrow, as another 50 basis-point rate cut is expected.  The more important part will be the policy statement going forward.  As of this writing, Fed Funds futures are priced for a 43-percent chance of a 50 basis-point cut and a 41-percent chance of a 75 basis-point cut. 

Before the Fed meets on Tuesday, though, the New York Empire State Index will be released this morning.  This particular report was very disappointing last month and provided a catalyst for one of the many downswings we have seen over the last month.  Analysts expected the report to show continued slowing, but not as bad as the -11.7 reading from last month.

Tuesday will be an incredibly busy day for reports.  In addition to the Fed meeting, housing starts and building permits will be released before the open and are expected to continue their slide.  Housing starts reached a 17-year low in December.  If the predictions are accurate, this will be a new low.

Also getting released tomorrow morning are the Producer Price Index numbers for February.  Analysts expect prices to rise by a modest 0.3 percent after the one-percent jump in January.  I would be surprised if this is the case given the incredible rise in oil prices since the first of the year.

The last two reports for the week are scheduled for Thursday morning.  The Leading Indicators report for February and the Philly Fed Survey for March are both scheduled for 10:00 a.m., and both are expected to show continuing declines in economic activity.  The Philly Fed Survey was another one that caught the market off guard last month and brought some selling with it. 

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