Week in Review: Unusual Strength

The market continues to move up in its torrid pace which is baffling. The DOW is now near 13000, and today 28 out of DOW 30 components participated in the rally in a convincing fashion. NASDAQ which underwent two consecutive days of distribution also found its footing on Friday on strong volume. This rally has been broad with big and mega caps leading the charge and the small caps have been noticeably quiet during this rally. In a strong market up trend, small caps and big caps alike lead the charge. Still, you have to respect the market strength no matter how much the fundamentals of the market place is dissociated from the technicals.

I am not sure what that is. I remain wary of the market as it stands. The follow through day on the NASDAQ was only after three weeks. There are convicing evidence that the interest rates might be headed up instead of down. Inflationary pressure remains and the FED is firmly hawkish in their stance. The housing related bubble topics and subprime meltdown has noticeably been absent from the main stream media's head line. There is rumblings of ALT-A Option ARM's growing influence on the mortgage and housing markets yet, the general populus and the media alike have not grasped this sensational story. Yet it still exists.

China continues its torrid pace of growth with GDP surpassing 11%, continuing to stoke fears of market crash in that region. There is speculation that the Chinese officials may raise interest rates twice this year to calm uncontrolled growth and inflation. This time around, the markets took things in stride and digested the news in a calm rational fashion. As I have said, this market is like teflon for bad news and continues to march forward. It is said that the market is forward looking for about 9 to 13 months. I wonder what circumstances are being factored in for the current bull rally, that has seen a brief respite in February 27th through two weeks of March? What issues would counteract and effectively neutralize the notion that we might be headed into stagflation or recession? I do not know.

What I do know is that the market is extended at these levels but markets rarely act the way they should when you think it should behave in the "normal" way. This market may continue to trudge forward until one of the camps are proven right. Either, the permabull's thesis for goldilocks economy is correct or the bear camp's look at fundamentals of the economy will win out. All I know is that there is a dislocation.

So far, I am net short Countrywide on issues related with their questionable internal affairs, opaque ways in which the shares are pumped, and their reluctance to come clean regarding the state of their company. Even with the less than admirable pump by Cramer, the stock seems to not be able to penetrate the $38 mark. One thing to be cautious about is the earnings on April 26th. This stock will probably move violently one way or the other. It may be a good idea for me to hedge the short position with calls slightly out of the money at $40 July calls. I will see how it shakes out next week.

Google reported stellar earnings and the stock has now began finishing the right side of the double bottom base. The buy point according to the IBD rule is $513, which represents the double top peak. It may test that level perhaps as early as next week, but my thinking is that we will be trading in the range between $477 to $495 through next week. A strong catalyst will be needed to punch through the $513 level, but the chart looks beautiful at this point and I believe a big upside move is imminent. Google currently trades under forward PE of under 29. A valuation that is lower than Yahoo, BIDU, and EBAY. Yet despite the negative sentiments surrounding the question of growth of this stellar company, it continues to wow the street with its latest earnings of over $1 billion dollars for the quarter. Truly astounding.

I am closely following Apple, LHCG, EZPW, PRAA, CSCO for possible long position and BIDU for short position.

Next week should be interesting with a flurry of economic numbers due:
Tuesday: 10:AM Consumer Confidence
10:AM Existing Home Sales
Wednesday: 8:30 AM Durable Orders
10:AM New Home Sales
2:PM FED beige book
Friday: 8:30AM GDP Adv
8:30AM Chain Deflector

Good luck. I keep one finger on the sell button should the reason arise.