Henry TO MArket THoughts.com Market Analysis

The market has certainly not disappointed since I left the United States more than a week ago. Expensive valuations or not, the technical conditions of the stock market still look good here. Again, a lot of my short-term indicators are overbought, but in a typical cyclical bull market, these indicators can stay overbought for a long time even as the market continues to rise. As long as the money keeps coming in; as long as the speculative fever does not get too out of control; and as long as there is no huge insider selling or a financial dislocation, we are most probably still safe for now.

A few things that I would like to mention:

The jump in The Conference Board’s Consumer Confidence from 92.6 to 102.4 is bullish, as it is now on an uptrend once again while the reading is still not too excessive. Once this reading gets up to over 110, however, it is time to start being more careful – especially if liquidity starts declining in the stock market.
The conclusion of the PeopleSoft and Oracle deal in mid-January will bring in approximately $10 billion in cash – providing a further boost to the stock market.
The numbers (and size) of buybacks and cash acquisition deals continue their brisk pace per TrimTabs. The fact that the IPO calendar is also now virtually non-existent until mid-January is very bullish. TrimTabs now says that their liquidity indicators are at their most bullish since they began their services in 1995.
The total short interest on both the NYSE and on the NASDAQ is still at historically high levels – suggesting that few investors have bothered to cover their short positions since the late-October lows. This is further confirmed by the low levels of the NYSE specialist short ratio (however, the latest week’s data has not been updated for some reason).
The amount of margin debt outstanding on the NYSE rose $11 billion to $197 billion from October to November but is still more than $80 billion off from its all-time set at the end of March 2000. The experience of the October 1966 to 1968 and May 1970 to 1972 cyclical bull markets has shown that the peak of margin debt tends to surpass the peaks of the prior cyclical bull markets – even if we are still in the context of a secular bear market (which I believe we are in now). The fact that margin debt has only grown $15.4 billion in the last six months is also not excessive. For comparison purposes, margin debt outstanding on the NYSE increased $110 billion (!) in the six months leading up to the grand finale in March 2000.

I hope my subscribers will have a great New Year’s as well as a great 2005! May you enjoy great returns in 2005 – remember, there are always more important things than the stock market!

Signing off,

Henry To, CFA