Sunday, November 07, 2010

Market commentary for the week of Nov.8th

It will be a slow week regarding economic data being released. We have the usual Weekly Jobless Claims and Continuing Claims on Thursday. There is data being released on the Trade Balance and on Friday there is information being released from Michigan Sentiment and Consumer Confidence Indexes. So it is really a quiet week as far as data is concerned.

I have attached a chart showing the Put to Call ratio for all equities for 2009 and 2010. On Friday we hit a multi month low on this reading. At extremes of the top and bottom they are buy and sell signals. We are approaching the low, which often can mean a sell signal is close. The day of the low is not the actual day the market reverses but it often does within a week. I would prefer to see the Put to Call ratio down to 0.50 to 0.55 for a definitive signal, but we haven't had that low a number in a very long time. Although on Nov. 5th, we did reach a low of 0.55 in the first hour of trading and then it moderated later to close at 0.69 for the day, as you can see in the chart below.

The lowest blue point occurred on April 14th. The Dow closed that day at 11,123 and then it rose to the peak you see on May 20th. The Dow on May 20th was at 10,068, so you can clearly see that the low point was a sell signal for the Dow and other indexes. If we go any lower on the Put to Call ratio, I would say it is a Sell Signal of an anticipated market drop.

Also, one important fact not to be thought of lightly is the planned elimination of the Bush tax cuts as of January 1st. The Congress is creating uncertainty, as to whether the lame duck Congress will approve extending the Bush tax cuts for another year for everyone, or just those making up to $250,000/year. That means many may choose not to take a chance that Congress will approve the tax cuts and, instead, sell their stocks to lock in their profits for 2010 in the lower tax bracket. So there are many moving parts. Instead of the market rising as it usually does in anticipation of the Christmas shopping season, we actually may have pressure to sell stock before years end. So paying attention to this Put to Call ratio and the activities of Congress are most important! Stay tuned! Oh, and don't forget to take the mini poll on the right margin of this page. Thanks.

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