Stock Market Analysis

Wednesday, April 14, 2010

Breakout?

The Dow made a breakout today by a huge 103 points on returning consumerism indicated by higher than expected retail sales.

The US market celebrated the return of consumers as retail sales beat consensus of 1.2%, turning in an actual 1.6%. Consumers form the basis of the US economy and the return of consumers is one of those end of recession signs most conservative analysts and investors are waiting for. Market opened northwards, met with some resistance before an inline business inventory number gave it a push that never looked back. All in all, today's economic data is telling us that jobs and buying may be back soon.

Even though today's market action is to be celebrated with many mid and small cap stocks posting tremendous gains, it is a day which must be taken with a big pinch of salt. Why? Because the optimism is just too overwhelming. In fact, the total equities put call ratio made a low not seen since Aug 2009, indicating a rush into call options on bullish speculation (see Put Call Ratio Chart). Yes, eventhough call options can be bought for many different purposes, speculation still remained the top purpose. What usually follows such overwhelming optimism is a short term pullback.

Looking back in August 2009, the put call ratio entered the 0.5 region on a single day rally of 155 points on 21 August. It was then followed by a retreat that took back all the gains and more before the bull trend resumed in September. This means that the Dow may not have cleared the gravitational field of the 11,000 points level yet. As such, I would be looking to close some of my more profitable short term positions, especially those that gained over 5% today.

For now, the Dow remains in an all out bull trend.

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