Don’t Chase Stocks

Markets have shown some buying over the past few weeks. Since declining to a multi-month low of 10,747 on July 17, the blue chip DOW has gained 4.15% to break 11,200 on July 28. We have also seen buying in the technology and small-cap areas.

 Yet in spite of the buying, markets continue to trade apprehensively at this time. The risk factors remain high. The NASDAQ and Russell 2000 are down over 11% from their April and May highs. Large-cap stocks are doing the best. The DOW is faring the best, up 4.78% this year and down 4.10% from its high. The S&P is up 2.40% this year and down 3.66% from its high.

 As we move into the third quarter, stock markets are barely holding on. Only the DOW and Russell 2000 remain ahead of their gains in 2005, albeit the gains remain small. This was the pattern in 2005 when gains were lackluster. And, unless we see renewed buying in the third and fourth quarter, markets may continue to show poor results, a trend that began 2004 and extended into 2005. This year appears to be another lackluster year, indicating the bull market is over.

 Breadth and sentiment indicators have shown some improvement over the past week but before you get too excited, I advise waiting and seeing if a positive trend develops.

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 The current buying was driven by recent comments from the Federal Reserve hinting at a possible end to the rising interest rate cycle this year.

 On the energy front, the continued conflict in the Middle East is supporting oil prices with the basis September light sweet crude on the NYMEX holding at just below $75 a barrel.

 On the boiler, stocks have to contend with interest rates, the economy, inflation, earnings, and oil prices.

 At this juncture, I’m not convinced the market will reverse to the upside as the tension in the Middle East may escalate and driving oil prices higher.

 I advise caution. You may want to stay on the sidelines for things to settle down. Do not chase stocks higher.