Rally Underway

By Dr. Duru written for One-Twenty

December 6, 2007

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In between bearish warnings, I have stuck to a thesis that the year will close out strongly. The rally to get that done is finally underway, although admittedly we may run out of time to make new highs on the major indices. Yesterday, TraderMike noted the tough resistance waiting overhead, and today he notes the lack of volume in the follow-through rally. However, I still feel pretty good in declaring that the rally is underway. If you care to understand why, I will do a very high-level review of the missives I have been writing over the past month or so:

    Oct 28: I marvelled that the market had not faded the September's big post-Fed pop despite the increasing number of sectors that had faded the Fed and even made new 52-week lows. The full Fed fade started in earnest 4 days later.
    Nov 11: I wrote a bearish missive to declare the Fed fade complete, but I still managed to guess that the dollar could be reaching a bottom. I reminded us to keep an eye on what "might go right." Even in the midst of the technical damage being done to the markets at that time, I kept my eye on a strong finish for the year.
    Nov 20: Finally a light appeared at the end of the tunnel as the trusty T2108 indicator worked its magic and suggested a near-term bottom was at hand. Six days later, we finally hit that near-term low point.
    Nov 26: Dr. Duru went on a rare shopping trip and took pride in his fellow American consumer. I called Best Buy (BBY) a buy and suggested it could soon reach new all-time highs. BBY is now about 10% higher, and I am glad I put my money where my mouth was on that one. Recession fears will need to abate before those all-time highs melt away.
    Nov 27: The euphoria from a seemingly successful "Back Friday" suffered a quick one-day fade, so I tool time out from the short-term bullishness to explore the technical case for long-term bearishness. Even GOOG's chart was flashing a warning to me, and I mentioned that the Fed would need to provide some catalyst for the market BEFORE the December meeting to prevent us from swooning further.
    Nov 28: Finally, the euphoria instantly returns as the Fed delivers the early "wink and a nod" I was looking for - right on time. We were off to the races again with the biggest one-day rally in something like 4 or 5 years. I proclaimed the August lows successfully tested and declared the November low the new spot to watch.
Since then the market has had 3 good up days which are good enough for me to think we have follow-through. I remain focused with an eye on the year-end prize. I even think that it does not matter what the Fed does next week, the market will now choose to interpret it as good: 1) give us rate cuts, we love the liquidity, 2) give us no rate cuts, we love the implication that the economy is just fine. You can make the same analogy to the December job report coming tomorrow morning.

Now, before we all get overly excited, I must point out a new divergence that truly has me perplexed: Cisco (CSCO) vs Intel (INTC). (Read disclaimer here). We all know by now the heavily subscribed play to buy big-cap tech. Today, INTC led the NASDAQ and surged to a new 52-week high on expectations for robust PC demand (nevermind that Dell recently got clobbered for a 13% loss after it reported earnings last week).


However, CSCO continues to languish below its 200-day moving average (DMA) a month after disappointing Wall Street and getting a 10% one-day decline in return. In fact, you can still buy CSCO at early January, 2007 prices (see chart below):


I find this divergence odd because both INTC and CSCO should be partners in this surge of big-cap tech. I also find it hard to imagine why the market would bet on robust Pc demand over reboust enterprise demand for network gear in an economic environment that is supposed to be teetering on recession. I am thinking CSCO may be the "sneaky" bargain here, but I want to at least see it get back over that important resistance of the 200DMA. And even after that we will have that declining 50DMA to contend with next.

And for my favorite "tech tell" Google? Well, it flipped quickly from a warning sign to an all-systems-go sign. The stock has bounced three days and looks poised to challenge the high made in November. The volume has been lower than average, so some caution still applies.


Be careful out there!

DR. DURU®, 2007