Everyone wants to know where will the current rally take us?  Will be able to break 10000 on the Dow Jones?  Will we eventually go back to the old highs?  Obviously nobody knows the exact answer, but one thing we know is that many people look at the same charts and sometimes it’s a self-fulfilling prophecy.

Below is a picture of the Dow Jones going back to 1989 (monthly).  We could be setting up for a massive head and shoulders.  The left shoulder is the 1999/2000 time frame.  The head was October 2007.  If we continue to rally with some minor pullbacks, we could ultimately rally to 11500 over the next few months.  At that point, the technicians will be watching this chart closely.  The long term head and shoulders would be complete and we could fall hard.  Just food for thought.

Dow Jones (1989-Present) monthly

Just when we thought there might be some sort of real correction (at least more than the 2-3% variety), the buyers came in today on basically no news.  There was some M&A activity with Xerox & Johnson & Johnson.  In addition, there was some upgrades in the tech sector which I continue to like, especially the chips.

Stocks opened higher and never looked back.  There was buying in several sectors including REITs, small caps, technology, emerging markets, etc.  We’re approaching the end of the quarter and we know there is typically some shuffling around to make portfolios look better.  Window dressing, as it’s typically called, is when portfolio managers buy and/or sell positions to make their holdings look better than they have throughout the quarter.  For example, Apple (AAPL) & Goldman Sachs (GS) have done great this quarter.  If I was a mutual fund manager and didn’t own these two, I could run out and buy them now and get them on the books for the end of the quarter so when you get your statement, you’d see these as holdings.  Naturally, you’d assume they were owned for some time.  You don’t get to see the transactions, just the holdings.  Thursday is the beginning of the 4th quarter and we need to see if that brings in some real selling or not.

Today’s rally was still impressive whether it was window dressing or not.  About 86% of the volume today was upside volume on the NYSE.  But, the overall volume was low.  So, while the quality was good, there still seems to be a lot of people watching from the sidelines.  One way we’ll know that this rally since March 9th is ending is to see what we call a blow off top.  That’s when the charts go straight up and the volume increases dramatically.  That hasn’t happened yet which leads me to believe there is still more conversion that’s yet to take place.  When I say conversion I mean naysayers turning into investors and buying.  Even though the rally was weak from a volume standpoint, it was impressive enough to make bears very concerned and scared.  What if the big correction was only a few percent and a few days?  Uh oh.  Uh oh if you’re not invested.

The Sugar High Continues

A few weeks ago, the chief investment officer, Mohammed Al-Arian commented on CNBC that what we’re seeing in the market right now is a “sugar high”.  First of all, this is a bond guy commenting on the stock market which he’s free to do.  But, what many fail to realize is that a “sugar high” can make you a lot of money.  I’ve equated to all the stimulus as a steroid shot.  My son had a RSV when he was little and they gave him a steroid shot.  He perked right up and felt great on the way home.  I was amazed.  Now, we know you can’t keep giving him steroid shots for the rest of his life.  It would eventually kill him.  But, for the short-term, it did wonders to make him feel better.  That’s what all the printing of money has done to the economy.  It’s the steroid shot.  Bad long-term repercussions, but great in the short run and great for stock prices.

Speaking of sugar, my sugar high continues.  I’ve mentioned owning sugar the last several weeks due to the demand/supply imbalance.  More consumers consuming sugar, a drought in one place and too much rain in another where it’s produced means higher prices.  Recent reports suggest it could still triple from these lofty levels.  I own the iPath UBS Sugar Index ETN (SGG).

You can see from the chart above that it’s been a great trade.  After a huge move up in August, it had the correction it needed in early September and held right at the 50-day moving average.  This ETF has plenty of room to run not only due to the technicals, but more importantly the fundamentals which remain excellent.

Often times, I discuss the fact that there is so much economic data released everyday, it can sometimes get confusing. As far as making money in the stock market, some indicators matter and some don’t.  Some are leading indicators and some are lagging.  Our job is to filter out the noise and concentrate on the ones that matter.  At 7:30 a.m. CST this morning, the durable goods orders report was released.  The estimates were for growth of 0.4%.  Instead, this reported which is often revised later was reported as -2.4%.  The question is whether or not you should pay attention to this as it relates to buying or selling stocks.

Below is a picture of the durable goods order growth/contraction rate since 1989.  It’s gone back and forth between 60% correlated to the S&P 500 and 60% inversely correlated to the S&P 500.  Usually, I put a graph up that helps you make money.  The one below is a picture that will help you avoid losing money by paying attention to the wrong indicator.

Let’s be clear that nothing fundamentally has changed.  The Fed is going to leave rates low for a while and they will keep buying various bonds to keep long-term rates low as well.  The economy has stabilized and in fact is growing.  The positive economic surprises will continue as leading indicators are still improving.  But, technically, have things changed?  Not yet.  But, the technicians saw an outside reversal day where we went to new highs and reversed to new lows (and on stronger volume).  Definitely something to watch but it’s only one day.

You can see on the chart below of the S&P 500 that if we stay in the uptrend we’ve been in for some time, a likely correction could be to the 1010 level.  That would be approximately a 6% correction from yesterday’s highs.

Corrections happen even in good markets and they can start at any point.  You’re more than welcome to try to trade them but just be careful that this is still a very strong market.

[youtube=http://www.youtube.com/watch?v=2b7QjJtoBdg]

[youtube=http://www.youtube.com/watch?v=YoxHJnvU5TU]

http://www.cnbc.com/id/15840232?video=1273791880&play=1

http://www.cnbc.com/id/15840232?video=1273791899&play=1

Even bull markets take a break every once in a while….don’t they?  Several of my indicators I watch are at a point where corrections would normally take place.  If this was a normal market.  I think even the bulls have been surprised at how persistent this market has been since March 9th.  Today, the futures were down pretty hard, the dollar was rallying, China was down overnight, and gold was back under $1,000 an ounce. About an hour or two into the trading day, the market firmed up and tried to go into positive territory.  In fact, technology actually finished the day in the green (Dow Jones -41, S&P -3, & Nasdaq +5).  But, this was supposed to be a down day.  It’s time.  It’s overbought.  But, here we are with a mixed day.  Some stocks were up and some were down, gold rallied back, and the dollar sold off.  The internals weren’t great, but they weren’t horrible either (decliners beat advancers 2:1).  Just a mediocre day.  Definitely not a victory for the bears.  For those wishing for a down market or even worse counting on one, the worst thing that can happen for them is that the “overbought” condition works itself off by the market simply moving sideways.

But, let’s say we do get a correction in the 5% variety or so.  How do we know if it’ll be more?  How do we know it’s simply a correction in an upward trending market?  All we can do is monitor the current market, look at historical indicators, and make an assessment.  So, what historical markets am I talking about?  There’s a few things we know about market tops from a historical perspective.  Last week, we saw an expansion of new highs on the NYSE & the advance/decline line went to new highs.  Those usually peak about 4-6 months before a major top.  Secondly, the leading economic indicators continue to improve.  That’s highly correlated with stock prices.  Lastly, not many investors are interested in selling at these prices.  You need more supply and less demand to cause a major top for stock prices.  Therefore, I think any pullback will be a buying opportunity assuming you still have some cash sitting around.

In the short-term, you could also see some dollar strength, so it’s important to have some investments that benefit from a stronger dollar to balance out the portfolio like U.S. small caps, biotech (which is looking quite strong), & specific areas of technology.

Television

I’ll be on CNBC Asia tomorrow evening (Tuesday at 6:10-6:30 p.m. CST).  In addition, I’ll be on Fox Business Wednesday morning at 8:10 a.m. & 8:30 a.m. CST.

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The topic that’s discussed most on my radio show (www.bizradio.com) every day seems to be natural gas.  For a longer-term trade, I still think it makes a lot of sense especially if one shorts oil versus natural gas.  The easiest way to play natural gas has been UNG the past several months.  But, in early summer, I exited UNG because of the internal composition of the ETF.  There was chatter that the CFTC would limit contracts, etc. for speculation in gas & oil and other contracts.  In fact, UNG was about 30% of the daily volume of gas contracts.

At that point, UNG stopped issuing new shares.  That meant that even though there was demand for UNG, the fund wasn’t issuing new shares causing a distortion.  The distortion basically made UNG into a closed end fund where the fund was trading at a premium to natural gas.  Remember, closed end funds have a set number of shares and therefore trade at a discount or premium to the NAV.  Open end funds issue new shares every time you make a deposit causing the fund to trade at the NAV price.

At one point in the past few weeks, UNG traded at almost a 20% premium to natural gas.  I warned many of you to avoid UNG.  I continued to like natural gas but thought owning natural gas companies was a better way to get the exposure.  Funds like the Fidelity Select Natural Gas Fund (FSNGX) made more sense to me.  UNG decided to issue more shares this week.  That meant that the premium in UNG compared to gas would disappear.  Sure enough, if you look below you can see the premium vanishing.

For the week, natural gas finished up almost 28% versus UNG which only rose 10%.  So, the premium almost entirely eroded just this week (still about 5%).  You might ask what’s the big deal?  UNG still went up.  But, what if natural gas had fallen 10% this week.  UNG could have fallen almost 30%.  Fortunately, natural gas was up.  But, UNG investors got left behind.

I’d still stay away from UNG for now because there is still a premium.  If you’re still bullish on gas, own the companies.  It’s the easiest way to get exposure.

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Below is a list of the best performers and the worst performers on the Dow Jones year to date.