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News Letter Reviews Starting to Get that Uneasy Feeling
News Letter Reviews Starting to Get that Uneasy Feeling 
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| Starting to Get that Uneasy Feeling |
| Thursday, 11 October 2007 | ||||||||
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Dear Reader, Earlier this week, I pointed out to our IDE Earnings Alert subscribers that the market was beginning to looks suspiciously like the same market that we saw in July as second-quarter earnings season got started. Well, we’re two days into the results and the market is beginning to show signs of tiring. Why? Well a few reasons stick out in my mind. First, the recent market has been driven by monetary policy rather than the fundamentals. I captured the essence of the recent rally during a CNBC interview on Wednesday morning, describing the market as being “drunk on FOMC policy.” I was referring to the fact that investors continue to rally stocks higher based on the FOMC’s recent action, despite hints that the fundamental foundation of the market is under pressure.
Most recently, I’ve noticed an increase in the rate of downgrades in company outlooks compared to upgrades. The ratio of downgrades to upgrades recently crossed above 2.9,the highest level of the past year. This indicates that most companies participating in the “warnings season” are seeing dimmer outlooks. Just Wednesday morning, International Paper and Chevron were added to the list of companies trimming their outlooks (and I thought it was impossible for any oil company’s prospects to recede). There are other indications that the market is setting itself up for a repeat performance of July’s selling. I often talk about the effects of overly optimistic sentiment on the market. Looking at the recent Investors Intelligence data, I’m seeing signs that investors may be getting a bit ahead of themselves. This week’s poll results, released Wednesday morning, showed 60.2 percent bullish and just 21.5 percent bearish. The ratio of bulls to bears has now hit the critical mark that often indicates increased odds of a weaker market. Similarly, the activity in the CBOE pits has started to favor calls a bit too heavily. In fact, the CBOE equity put/call ratio is now trading towards its July lows. This is an indication that investor sentiment is leaning a little too heavily to the bullish side of the market. Does this mean that the market is doomed to go down tomorrow? No it doesn’t, but it does mean that the blistering rally will be a little harder pressed to continue its move higher. This also means that there will be a lot more sellers involved in the market when the time does come for it to turn lower. Good luck with your trading. CJ P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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