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From the Trading Turret

May 1, 2005

Please note that “From the Trading Turret” is changing from a weekly to bi-weekly publication. The markets look like they are settling in for the year and I don’t want to bombard you with repetitive ramblings. If conditions warrant, I’ll put something out on an “as needed” basis. Remember, you can keep up to date with what’s going on by checking my blog at: http://tradingadvisor.blogspot.com.

Over the past several Turrets, I have stressed the importance of risk management while the market stabilizes around key support areas. I’ve maintained an unusually cautious bias since our indicators turned negative earlier in the year. During March and April, the deterioration of the market's internal condition continued due to the weakening economic landscape, growing inflation concerns and the weakness in the major indices. I mentioned that any breakdown could lead to significant technical damage. Support areas failed and the market tumbled causing investors to head for the exits. In all, two weeks ago we witnessed the worst week for the market in more than two years. As for post election gains, well, they have been erased. 

There were many warnings signs of an impending decline, some of which have already been discussed at length. The market's internal condition has been less than ideal with weak breadth statistics and lousy volume flows, even on days when the market attempted to rally. The Nasdaq Composite was the first major index to breakdown which isn’t surprising since it been the weakest index, and the others followed suit.

For Dow Theory apostles, the Dow Jones Transportation Average began declining in early April, well before the other major indices. This steep decline resulted in a Dow Theory sell signal, which has potential negative implications for the intermediate to long-term outlook for the market.

For example, the latest American Association of Individual Investors (AAII) sentiment poll shows that 16% of individual investors are bullish. This reading is lower than the low made during the last bear market. Given the washout decline and oversold condition, the market is likely to mount some form of rally attempt. The market may test or slightly break recent lows before rallying, but I look for a fairly sharp rally to begin pretty soon.

Many of the concerns I have today are the same that I highlighted in late 2004 when I stated that 2005 would be a difficult year for the market. While I think the market is due for a rally, which could turn out to be quite strong, I think it is unlikely that the market will be able to exceed its early March highs. If that scenario pans out, the market would turn down more strongly during the second half of the year.

On the economic front, recent news has not been good. It clearly shows that the economy is slowing. Manufacturing sector numbers, consumer sentiment numbers and inflation numbers have all been disappointing. The Empire State manufacturing report showed that manufacturing in New York plunged in recent weeks and nationwide, industrial production rose just 0.3% in March. The Consumer Sentiment survey sank to an 18-month low with both current conditions and expectations about future economic activity falling. The weakness in consumer sentiment is troubling news given consumers concerns about rising energy costs and sluggish job growth. On the inflation front, prices continue to rise.

I normally don’t spend a lot on economics because it’s dry as day old toast, unless you majored in it like I did. In March, wholesale prices rose 0.7% which was the most in four months. The culprit driving this was higher energy costs. (As if you needed an economist to tell you that!)  The core rate of inflation, which excludes food and energy, rose just 0.1% in March. Over the past 12-months, core prices are up 2.6%. As an aside, there’s probably someone in Washington that will tell you with a straight face that inflation is under control. But, I say – let’s ask a family of four trying to keep the gas tank and pantry full.

Operations: I’ve been working on the phone problems and it looks like the (678) number is going by the wayside. Effective immediately, please use the toll free number (800) 427-0886 to reach me.

Technology: I continue adding links to the web site. I’m trying to add a few bodies for the summer and you’ll soon see a “Career” tab on the home page. You’ll also see a “Document Center”. Here you’ll find the documents to update and/or make changes to your accounts.

That’s about it. The GA High School regular baseball season ends on Wednesday. It’s been a great year and I’ve seen a number of future Major League Baseball Stars. If you live in Georgia, take your kids out to see one of the many regional playoff tournament games. You can’t beat the price and it’s a great way to support your local schools and of course – the kids!

That’s about it for now. Have a great week!

Bob

Robert Christy is a professional trader, author and money manager. Mr. Christy is also the President/ CEO of Christy Investment Group, Ltd., a registered investment advisory firm. At the time of publication, Mr. Christy may from time to time write about stocks in which he, Plato Advisors LLC, or Christy Investment Group, Ltd.  has a position. In such cases, appropriate disclosure is made.  Under no circumstances does the information in this column represent a specific recommendation to buy or sell stocks. Mr. Christy appreciates your feedback and invites you to send it to rac@christyinvestments.com.