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Disturbing comment from subscriber

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On Friday, I was forwarded an e-mail I found "disturbing." The subscriber seemed to think I didn't realize the market was in an upward trend and that I was concentrating too much on bond YIELDS and not bullish enough. While I don't disagree the MARKETS are in a short-term upward trend (key word... short-term) some of the trends that the subscriber thinks are going to hold are simply unreasonable. Is the trend "reasonable?"

S&P Retail Index

I consider my current market bias as "cautiously bullish." That's "bearish" to one subscriber (maybe other's too), but the simple fact of an upward trend doesn't mean we're in a new bull market. The trend we are trading "the trend is your friend" must be reasonable. Is it "reasonable" to think that an extension of the current trend in the Retail Index (RLX.X) will have this index trading the $1,023 level by February 5th of 2002? Even a more "reasonable/gradual" trend this spring wasn't able to hold. Eventually, the RLX.X broke that more gradual and VERY SHORT-TERM trend. Then, that short-term trend acted as resistance and the longer-term downward trend also acted as resistance and the decline was underway.

Who cares about bond YIELDS?

This was another comment from the subscriber that didn't think I knew the market was in an upward trend. Funny, but bond YIELDS (short and long-term) turned lower in June as money fled the stock market and rotated back into bonds. Could the lower bond YIELDS have possibly been cash rotating out of stocks, while some investors were trading "unreasonable" upward trends in stocks? I'm thinking the "reason" that some traders find themselves on the wrong side of the stock market is that they don't understand the bond market or even following it and think "unreasonable" upward trends will hold from here to eternity! Ignore the bond YIELDS if you will, but I consider that analogous to crossing a busy street on foot and only looking one way before you cross.

Don't fight the Fed

I'm sorry, but I have a problem putting my full faith in this saying. The Fed began cutting interest rates on January 3rd. The S&P 500 was trading $1,347 at the close of trading that day. Today, the S&P 500 trades $1,144 (-15% from January 3rd close). Don't fight the Fed? Give me a break. A trader blindly trading the SPX bullish since January 4th most likely has his/her fanny in a sling. If they were trading "unreasonable" short-term upward trends and not taking profits or stopping out of some trades at that time, then they probably stand, not sit, at the dinner table.

Don't get me wrong!

Longer-term, I like what I see. It's not the stock market that has me leaning toward the bullish side longer-term. It's the BOND MARKET! The longer-term end of the bond market has YIELD heading higher and I feel this is bullish. This tells me that LONGER-TERM, the market is finding the safety and now LOWER YIELD unattractive!

HOWEVER! The shorter-end of the bond market and continuing declining YIELD there tells me that there is still a lot of money that is flowing into this end. Yes, it may be that the Fed is still in an easing mode, but it is also telling me that there is still a lot of money that isn't convinced that the stock market is going to continue some of these parabolic upward trends.

Does that mean I just go home if I'm a bull?

Heavens no! I lost some needed sleep this weekend after a subscriber told me I was too bearish and didn't understand trend! That really eats at me. Where was I bearish on November 14th (03:00 EST Update) in shares of Cendant (NYSE:CD) near $14.83?

Was I too bearish on Friday or even today when I think subscribers should be taking profits at another bullish target of retracement? The answer in my mind is "no." Every subscriber that took the trade that day, or even the following day when the stock traded $15 and set off a triple-top buy signal should now have a reward. Some subscribers sold early near $16.40 and PAID THEMSELVES in the form of a capital gain. That's fantastic for three days of capital exposure! I don't consider those subscriber's bearish. I also think there are lots of these types of trades still to be had! Go back if you can and review some of the observations made regarding relative strength, the point/figure chart, the bar chart using retracement and what bond YIELDS were doing at the time. We can look to try and duplicate these technicals!

Cendant Corporation Chart -

I don't consider a subscriber, nor myself, as bearish when it comes to locking in a 3-day profit of 10% at a retracement level and 200-day moving average that could act as resistance. I don't consider a subscriber as being "bearish" when he/she sells the stock for a 26% gain a month later. What made this trade a "slam dunk" for many was what was taking place on November 14th and 15th in the bond market! That's right! Traders actually may have had some CONVICTION to buy the break higher in Cendant as the bond market was unraveling as there was a lot of cash freeing up! Today, I'm thinking some of that money found it's way into Cendant!

However... a trader that didn't like the stock because it was "economically driven" (I got bearish e-mails from that Cendant profile) could very well have passed on the trade. That's OK! Just don't call me an eternal bear that doesn't understand trend or trying to "fight the Fed."

Not just Cendant

One stock that has "amazed" bullish traders are those of Office Depot (NYSE:ODP). On September 17th, the first day of stock trading after the terrorist attacks here in the U.S., I gave bullish commentary on two stocks, one of them being Office Depot. We had been mentioning the stock as bullish prior to the terrorist attacks and felt any weakness in the $11-$12 range was a bullish opportunity to get long. That day, subscriber's received their wish for the pullback (see Nov. 17th, 09:00 update) as the stock traded $11.00 exactly, finished the session at $12.15 and now trades $16.64 (+30% from $12.80, which was session high).

For those keeping track, the "other stock" was Campbell Soup (NYSE:CPB). That stock didn't see selling on November 17th at $28.25 and trades just marginally higher here at $29.32. However, we did advise traders to lock in some profits when earnings were announced (see November 6th update at 01:00 EST) or snug their stop up under the stock at $29.50 at a minimum.

Considering both of these stocks trade higher from one of the most anticipated bearish days in market history, they haven't done too bad.

Be reasonable, and take profits

Be reasonable with your trading! Don't think that just because a stock has gained 50% that you've "missed out." Don't think that because you sell a stock for a 10%, 20% or 30% profit that you're getting out too early or that you're trading against the trend!

I think some subscribers that got slaughtered in the past two- years are those that blatantly disregarded what the bond market was telling them (what we were telling traders/investors to be careful of). Now everyone that got slaughtered thinks the MARKET owes them back all those losses and then some gains in a three- month period. This is about as unreasonable and some of the trends you may be trying to trade.

This is it for my "soap box" speech. From here on, I will place all bond market observations at the end of my intra-day commentary. If you don't want to read it, then you're done early! However, you might also be missing out on 1/2 of the MARKET. Remember the equation for the market is Market = Stocks + Bonds. Leave out half and you may never know what you're missing.

Jeff Bailey
Senior Market Technician
Option Investor

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