A Bit Too Frothy.

For the first time in a couple of months I must admit to being a little worried short term on where we are with the market. I was going to try and illustrate some of my concerns by posting a chart of the SPY (ETF on the S&P 500) to show you a part of what I use to measure over-bought & over-sold readings on the market. Unfortunately I can't get my editing system to download my charts right now. I'll work on it and try to come back with something later.

If I could show you the charts we would notice that the market is very over-bought and has traveled quite a distance in a very short time. The other thing I'd point out is that the major averages have all had pretty decent moves since hitting lows in the September-October period. For instance, the S&P has advanced about 10% since its October lows. That would annualize at something close to 40% if it were to continue. Moves like that just seem to bring more money into the markets. The data showing up from mutual funds on money flows is confirming this at least in early January. When that happens it is often put indiscriminately to work.

The price of oil seems to want to go up every day. If this continues it could at some point put a lid on the market's valuation. Iran's nuclear issue seems to want to play center stage earlier than I imagined {See my 10 predictions for 2006}. What may be worse for stocks though is that the beginning of the earnings reporting season is upon us. So far the few companies that have reported have not set the world on fire with results and forward guidance. The meat of these results begins next week and we should see if this trend continues then. Now I don't want to overthink this and be Chicken Little.. I don't think at this point that we are looking at the beginning of catastrophic price declines. But seeing how far we've come and trying to balance the risk reward equation for each of my clients, I do think that for the most part I will be somewhat of a net seller next week in accounts that I feel need a bit more cash. Cash is the best defense against a market decline. Again I'm not thinking that I'll be an aggressive seller but I do believe that the market is in need of a rest and plan to act accordingly.

Net Seller defined: The some total of all transactions taken by Mr. English for his clients at Lumen Capital Management, LLC. This can and often does vary among clients due to their individual portfolio goals and risk parameters. Certain clients of Lumen Capital Management, LLC are long SPY although positions can & do change over time.