THE NEW ELECTION RALLY?

The mother of all counter trend rallies hit the market this week; but the bigger question is whether or not we are seeing a slightly earlier repeat of the 2004 election rally. In that year the market rallied from August into the November elections and beyond pretty much without significant pause. There’s seemingly no reason why this cannot happen once again. Since “seasonality� is now one of the most accepted principles of stock market trading, a case can be made for a repeat of ’04. If enough traders believe it to be true, then it becomes true. So far, as illustrated below, the “verticality� of the rally looks about the same as that of 2004.

There was a great case for noting the laggardship of the Nasdaq, technology, and semi-conductor stocks. Yet these stocks took off like a bat – about 18% in 18 days as measured by the semi-conductor ETF.

Still the longer term picture of the semiconductors looks weak, which lends credence to the counter trend rally theory. This is not relevant to the folks who are booking their 18% 18 day profit.

One must not forget the premise of this rally, which is lower interest rates, suggested by the talk by the Fed and government statistics. So it will be important to see if leading retailers such as J.C. Penney and Federated surpass their old highs. Similarly, in the summer of ’04, crude oil dropped from the $50 per barrel level. This time it may drop from the $75 level, and as they say, for oil, $70 is the new $50. As a consumer, $3.00 gallon in late August made me shiver last year. This year after paying over $3.20, I’m thrilled to pay only $2.99 per gallon.

Similarly the NYSE composite has been a leader and a break of the old highs will be of technical significance for the rest of the market. While the index has climbed about 9% since mid June, the longer term technical picture suggests it is in a complicated corrective pattern.

Valuations and corporate malfeasance aside, a long-long term look at the Dow Jones Industrial Average presents a case for a multi-decade cup-with handle pattern. Technically, this thing could break out to new highs!

A long term chart of the Nasdaq suggests nothing other than your typical post bubble dynamics. I’m not a believer. As shown below, in 2000 the average share volume of the Nasdaq moved from about 1 billion to 2 billion in practically the blink of an eye and it stayed there since. I don’t know what it is, but something isn’t right with this.

Short term volatility has made a B-Line for levels nearing its old lows. This is another important parameter to watch. Once again, as measured by volatility, fear has fallen off of the table and this reversed what appeared to be a newly forming uptrend. The volatility index is now near where it was at the early May highs.

Here’s another neckline to watch – the transportation index. This is another corrective pattern.

Here’s another important index – Banking. We’ll see if the Fed can continue to levitate the banking index. Until it does, it’s just another corrective pattern.

We’ll also see if the home builders can be pulled from their, thus far, vicious bear market. I’m not kidding myself. Who’s to say the homebuilders stocks won’t behave like the next General Motors?

Finally, the “New� expression… You know, “age 40 is the new 30.� “Oil at $70 per barrel is the new $50.�

Here are a few more "New� expressions.

Cisco is the new Radio Corp.

Buybacks are the new dividends.

A P/E of 20 is the new 10.

The iPod is the new Walkman, is the new 8-track is the new reel to reel.

Middle class is the new poor.

The corporate-owned press is the new independent press.

Greenspan is the new John Law.

Bernanke is the new Greenspan.

Regarding dividends, 1.5% is the new 3%.

Speculation is the new investment.

Debt is the new savings (so is home equity)

Wal-Mart is the new Woolworths.

General Motors is the new Chrysler.

Toyota is the new General Motors. (The Camry is the new Impala.)

Economic statistics are the new lies.

Financial engineering is the new research and development.

……………. is the new Enron.

World domination is the new world peace.

Today’s Market

The US stock market was up today as it was led by biotech and homebuilders, each up almost 1%. Trading volume was high, but not as high as yesterday. Tomorrow is options expiration. After a rip-roaring rally, the transportation index may have failed at previous support that is now resistance. (It was down only marginally).

Tomorrow, an overbought market will have to digest bad news from Gap Stores (GPS), Dell (DELL), and disappointing earnings from Nordstrom (JWN).

Oil dropped to near $70 per barrel, and interest rates were down again. This market is starting to smell just like August of 2004. This is except for the fact that for oil, $70 is the new $40.

Here’s the oil action in 2004. Note the mid-August swoon that occurred at that time.

Here’s the action for the 10-year Treasury note yield. Similar to this year, interest rates corrected downward in August of ’04, except that 5% is the new 4%.

Have a great evening!

Martin Goldberg

Copyright © 2006 All rights reserved.

Martin F. Goldberg, MS, P.E.