Rev Shark:
Reasons We Could Move Higher
11/18/2005 8:53 AM EST
"Who feels no ills, should, therefore, fear them; and when fortune smiles, be doubly cautious, lest destruction come remorseless on him, and he fall unpitied.
-- Sophocles
The irony of a market that is acting as well as this one is that the more positive sentiment becomes, and the more confident the bulls are, the higher the chances we will pull back. When everyone is feeling very good about the market, the more likely it is that they do not have uninvested cash and the less fuel there is to keep the move going.
The big problem with trying to time the market here is that we really don't know how much untapped buying power is left. You would think that given the big move we've already had that the bulls must be getting a little low on cash. However, we are also at that time of the year when money is contributed to retirement plans, bonuses are paid and there tends to be net inflows into the market.
Sector rotation can also keep the move going in some areas of the market as investors rotate out of old leaders and into new leaders. This can create strong momentum in certain groups like big-cap technology while interest rate-sensitive stocks like homebuilders, energy and others lose steam.
In addition to rising interest rates and real estate prices stalling, money may be flowing out of certain asset classes and into equities. The allocation trade out of bonds and real estate has the greatest potential to keep a move in equities going. Reallocation of assets is by far the biggest driver of new capital into the market and we really have no idea to what extent that may continue.
I've also heard talk about renewed foreign interest in the U.S. equities markets. The U.S. has lagged many of its international counterparts recently and some are seeing relative value here. That also has the potential to provide a large pool of buying capital.
Even with these potential pools of new capital for equities, this market is running awfully hot right now. The faster and higher we run the more likely we will see a very sharp pullback. However, this is clearly a bull market and a sharp dip is likely to be a buying opportunity and not the beginning of a major downtrend.
After some good earnings reports we have another strong open on the way. Overseas markets on up strongly, oil is down and gold is trading up. I'm looking for gold to make another move up soon.
Gary B. Smith:
