>> NEWS GOODIES <<

[TradingForWealth]

GM Chicks. Sentiment email today;
"The Epitome of Irrational Exuberance
By Rick Pendergraft

Dear Reader,

Virtually everyone in the world expected the Federal Open Market Committee to keep the Fed Funds rate at 5.25 percent at their meeting last Wednesday. And they did exactly that.

Despite this very predictable move, investors appeared surprised by the fact that the Fed remains focused on inflation as the biggest concern to the economy and not the dwindling growth rate. The anemic growth rate of 1.3 percent that was reported in the first-quarter GDP report on April 27 was the worst we have seen in the past five years. Despite this fact, the Fed remains focused on inflation.

What this says to me is that the Fed is closer to a rate hike than they are to a rate cut. And this doesn’t match the prevailing line of thinking. By most accounts, the majority of analysts, myself included, thought the Fed was closer to a rate cut than a rate hike.

But the 10 people sitting in the meeting (and the only opinions that count) did not see it the same way as the majority. This led to the selling we saw immediately following the rate decision and the subsequent selling on Thursday. Being that the market has been in an irrational state lately, the rally to end the day on Wednesday made little sense but it did follow with the recent pattern of rallying, regardless of whether the news was good or bad.

The fact that the Dow is reaching new highs almost daily and the S&P is closing in on its all-time high, while the economy is slowing rapidly, is very concerning. There seems to be a major disconnect between the economy and the stock market right now.

The recent winning streak for the Dow matched an 80-year old record of 24 up days out of 27. The last time this happened was in 1927 when the economy was firing on all cylinders, before the crash of ’29 and the Great Depression. To match this winning streak at a time when the economy is slowing to a crawl is unbelievable.

The daily chart of the Dow shows the winning streak with the blue arrow marking the beginning and the three red arrows marking the three down days from March 29 through May 7.



I am tired of hearing the words “irrational exuberance” that former Fed Chairman Greenspan uttered so many years ago, but looking at this chart with the backdrop of the current economic environment in the back of my mind, this could be the epitome of irrational exuberance.

As I pointed out last week, the NYSE reported its highest level of margin debt since September 2000. Almost all oscillators are overbought regardless of whether you look at daily or weekly readings, or whether you use RSI, Stochastics, or MACD. Optimism is high, stocks are overbought, and winning streaks are being matched, all at a time when the economy is slowing sharply.

I may be starting to sound like a broken record, but I am very concerned about the market right now. I can tell you that in my personal account I have taken profits on most of my bullish positions and have added additional bearish positions. There is a major correction on the horizon and I intend to at least protect my portfolio. Hopefully I will increase the value as a result of the bearish positions.

I encourage you to take some protective action as well. Either take some profits off the table on your long positions, or add protective puts to your portfolio.

Good luck and good trading,"