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Two Reasons to Stay Bullish

By Jeff Clark
Thursday, July 26, 2007

You don't often see days like Tuesday.
 
The Dow dropped more than 220 points, 90% of the stocks on the NYSE closed in the red, and 10% of listed stocks made new 52-week lows. The selling was pervasive. It started from the opening bell and fed on itself all day long.
 
To call it "ugly" is cliché, but it fits. Whether it stays ugly or not is another issue – and it's one worth exploring.
 
Let's take a look at the big picture...
 
For most of the past few months, I've been cautiously bullish – mostly because of the action in the semiconductor sector and the increasingly optimistic positions of commercial traders. While many technical indicators have straddled the line between bullish and bearish, those two have consistently signaled an imminent uptrend.
 
And they're still bullish.
 
As of last Tuesday, commercial traders – commonly referred to as the "smart money" – held the largest net long position since the stock market bottomed in March 2003.
 
It's normal for commercial traders to leverage up bullish positions when the market is in the process of forming a bottom (as it was in 2003). It is very rare, however, for them to be this long with the market at all-time highs.
 
The "smart money" isn't flawless, and we have no guarantee that commercial traders are on the right side of the market right now. But, given their track record, it's not too smart to bet against them.
 
As for the semiconductor stocks, take a look at this chart...
 
Two weeks ago, the semiconductor index broke out to the upside of its six-year-long trading range. If the breakout holds, this has enormously bullish implications. Of course, right now, that's a big "if." We had a false breakdown last summer, and it's entirely possible we're looking at a false breakout today.
 
For the time being, though, the optimists get the benefit of the doubt. The index has come back down and is now testing the breakout level. This is normal action, and the pattern remains bullish.
 
So, as long as the "smart money" is bullish and the semiconductors are acting well, it makes sense to stay long the market.
 
Best regards and good trading,
 
Jeff Clark




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Market Notes
Oil-service bonanza! America's largest drill rig builder, National Oilwell Varco, hits new all-time high on spectacular earnings report... up 100% in 2007.
 
REIT meltdown continues... America's largest apartment owner, Equity Residential hits new 52-week low... down 23% from February high.
 
Is there any end in sight? Homebuilders fall again... most nearing a 50% loss for 2007.
 
Earnings today: ExxonMobil, Cummins, Raytheon, SK Telecom, Ford.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1223.75 +0.1% +10.9%
Oil 37.80 -1.1% +0.8%
Gold 136.50 -1.9% +20.7%
Silver 28.08 -4.9% +57.6%
US-Dollar 79.65 +0.6% +5.2%
Euro 1.33 -0.3% -10.5%
Volatility 17.99 -0.2% -18.6%
Gold Stocks 576.48 -2.5% +25.0%
10-Year Yield 3.16 +7.5% -8.4%

World ETFs
Symbol Price
Change
52-Wk
USA 122.83 +0.1% +10.8%
Canada 30.41 -0.5% +17.1%
Russia 22.00 +0.1% +18.9%
India 38.15 +0.6% +22.5%
Israel 16.92 +1.0% +11.2%
Japan 10.56 -1.2% +6.6%
Singapore 13.66 -0.4% +18.6%
Taiwan 14.87 -0.3% +19.0%
S. Korea 57.35 +0.3% +21.8%
S. Africa 71.15 -1.5% +28.2%
China 43.99 +0.3% -1.5%
Lat.America 52.69 -1.0% +8.5%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 134.90 -2.1% +18.0%
Big Pharma 64.04 +0.1% -2.8%
Internet 72.89 +0.4% +27.4%
Semis 16.25 +0.4% +26.6%
Utilities 30.98 -0.7% +0.2%
Defense 18.55 +0.4% +8.7%
Nanotech 10.16 +0.8% +1.6%
Alt. Energy 10.20 -0.4% -4.6%
Water 18.77 +0.8% +14.5%
Insurance 16.14 +0.4% +19.6%
Biotech 20.65 +0.4% +27.3%
Retail 19.65 +0.3% +27.0%
Software 24.83 +0.7% +24.3%
Big Tech 53.88 +0.1% +22.7%
Construction 13.30 +0.8% +16.2%
Media 13.75 +0.2% +23.7%
Consumer Svcs 67.43 +0.1% +23.1%
Financials 54.95 -0.1% +7.0%
Health Care 63.89 0.0% +1.3%
Industrials 63.79 +0.4% +19.8%
Basic Mat 74.54 -0.1% +27.5%
Real Estate 55.53 +0.3% +24.4%
Transportation 91.65 +0.3% +25.1%
Telecom 22.69 +0.2% +14.6%