MarketWrap 1/20/10---FusionIQ thoughts on "Is this the top?"

U.S. stocks ended off earlier lows but still lost more than 1 percent Wednesday as China, earnings and the dollar's gains clipped the market's momentum after Tuesday's rally.  The Dow Jones Industrial Average shed 122.28, or 1.1 percent to close at 10,603.15, erasing all of the prior session's gains. It was the worst one-day percentage drop so far this year. The S&P 500 fell 1.1 percent and the Nasdaq dropped 1.3 percent.  Most Dow components finished lower, with IBM, Kraft and Alcoa at the bottom of the pack. Bank of America, Merck and Disney were among the few gainers.  Spooking investors was a report that the China Banking Regulatory Commission had asked several banks to stop issuing loans.  While the CBRC's chairman denied that he had asked banks to stop lending, Bank of China, one of the country's big banks, said it was taking steps to rein in loans.  The dollar hit a one-month high against the euro amid worries about Greece's financial situation, and rose against other currencies as the election of a Republican for a U.S. Senate seat in Massachusetts raised expectations for spending cuts in Washington.

As we commented earlier today to customers…..The legions of worry warts still abound as every minor sell down continues to be met with the response, "Is this the top ?"   The answer is probably not, especially while pervasive concern continues to be the dominant investor theme.  Now that said can we have a correction of five10 percent?  Of course.  However,  we continue to find it hard to believe that top is in play when everyone continues to call for it!  After all tops are formed when everyone becomes so comfortable with stocks they invest all their available liquidity without a hesitation or care in the world.  And clearly that is not the current sentiment.  Again, it is very likely we will have some semblance of a decent size pullback soon seeing the S&P 500 has run up 10% from just November 2009, 31 % since July 2009 and 64 % from the March 2009 lows.   So do we think a major top is in?  The answer again remains no.  In regards to protecting capital from a drawdown or a correction or what is the risk to putting new money to work today and the answer changes.  The answer in this scenario is the run up in equities puts investors at risk to a correction, not a top, but a correction.  Our guess is that the correction would be similar in size and scope to the June/July 2009 correction that saw the S&P fall 9.00%.  This correction would likely create more pessimism and fear and then create one last leg up that would create the overconfidence associated with a top or a very long and protracted trading range.  At this point the best thing to do it to place trailing stops on current positions and or buy an inverse ETF to hedge out some temporary drawdown possibilities.   From a trend perspective the trend remains up and must be respected.   If the S&P 500 violates its up trend near 1050 we would suggest getting more active with a hedging strategy or tightening up stop loss levels.  However, this remains a market fraught with caution not speculation thus we continue to believe corrections should be relatively shallow.

1/20/2009 ... Market correcting a bit ...

The legions of worry warts still abound as every minor sell down continues to be met with the response, "Is this the top ?"  The answer is probably not, especially while pervasive concern continues to be the dominant investor theme. Now that said can we have a correction of five10 percent ? Of course. However we continue to find it hard to believe that top is in play when everyone continues to call for it ! After all tops are formed when everyone becomes so comfortable with stocks they invest all their available liquidity without a hesitation or care in the world. And clearly that is not the current sentiment. Again it is very likely we will have some semblance of a decent size pullback soon seeing the S&P 500 has run up 10% from just November 2009, 31 % since July 2009 and 64 % from the March 2009 lows. However so we think a major top is in ? The answer again remains no. But in regards to protecting capital from a drawdown or a correction or what is the risk to putting new money to work today and the answer changes. The answer in this scenario is the run up in equities puts investors at risk to a correction, not a top, but a correction. Our guess is that the correction would be similar in size and scope to the June/July 2009 correction that saw the S&P fall 9.00%. This correction would likely create more pessimism and fear and then create one last leg up that would create the overconfidence associated with a top or a very long protracted trading range. At this point the best thing to do it to place trailing stops on current positions and or buy an inverse ETF to hedge out some temporary drawdown possibilities. From a trend perspective the Trend remains up and must be respected.  If the S&P 500 violates its’ up trend near 10,500 we would suggest getting more active with a hedging strategy or tightening up stop loss levels. However this remains a market fraught with caution not speculation thus we believe continue to believe corrections should be relatively shallow.

1/11/2010 ... Tops take time to form ...

For some reason tops tend to take more time than bottoms to form. My guess is this occurs because bottoms occur on panic which comes on fast and furious, sort of like a hundred yard dash, whereas tops are drawn out like a long leisurely walk. That said tops don't occur when everyone keeps looking. They occur when no one cares, after everyone has been lulled into a sense of complacency brought on by the slow steady march of higher equity prices.  What's the current pulse on sentiment you ask ? Well it is not warm and fuzzy and comfortable, rather it is skeptical, doubting and in disbelief. Again these aren't the words associated with topping action. In 1999 the phrases "I am quitting my day job" or "this is a NEW economy" or "my son is going to be rich, he just got a job at an internet startup" Dominated the landscape.  Even in 2007 while the sentiment wasn't as bubble like as 1999 there still was a calm, a feeling that stocks had by birthright only one way to go - UP ! So while anything can happen we just don't see a major correction coming when everyone is concerned or cautious - it just doesn’t works that way !! However just because everyone is cautious doesn't mean you forget about market risk or risk management. We have come far and fast and exit strategies and stops should be in place. However we are just suggesting that you don't cut your profits short just because things have appeared to go too far, too fast ! In our years of following equities we have seen a lot of too far and too fast keep going ! It is when everyone embraces too far and too fast that one has to worry. Our best guess is that equities will track they way they did in 2004 to 2005 following the big 2003 rally, by entering into a wide protracted trading range. Beyond skeptical sentiment being a bullish indicator market breadth as measured by the number of industry groups and individual stocks participating (while moderating from levels just a few months back) is still strong. Best. FusionIQ Kevin Lane

MarketWrap for 1/4/10--Stocks start new decade on positive note...

Stocks and commodities rallied and the dollar slumped on the first trading day of 2010 amid signs that manufacturing is improving around the world. Oil climbed above $81 a barrel after freezing weather hit the U.S.  The Dow Jones Industrial Average closed up 155.91 points, or 1.5%, to 10,583.96, posting its biggest gains in point and percentage terms since Nov. 9.  The technology-heavy Nasdaq Composite  gained 1.7%. The Standard & Poor's 500 index  climbed 1.6%, with all its sectors posting gains.   Its materials and energy categories led the gains, up 2.8% each as gold futures rose to a two-week high and crude-oil futures climbed above $81 a barrel while the dollar sank.  Investors were encouraged after the Institute for Supply Management showed a bigger-than-expected uptick in manufacturing activity during December, helped by improving production and ordering activity.   Factory employment also showed gradual improvement.   Also comforting some were Federal Reserve officials' comments from the weekend that played down the idea of lifting its easy-money policy in early 2010.  Nevertheless, Chairman Ben Bernanke said the Fed needs to "remain open" to raising rates to avert or pop future asset bubbles.  Trading activity picked up from the anemic pace of the last few months of 2009, hitting a two-week high, though it remained below last year's daily average. Most traders and money managers believe it will take a few more days for Wall Street's trading desks to return to full strength and that the gradual return of participants will tend to boost the market in the near future.