A Little Song, A Little Dance, A Little Seltzer Down Your Pants! 10-25-05

Good Afternoon.

The market could use a little "spritz" to the downside before we can break out some more good cheer. Just like Mary Tyler Moore at Chuckles the Clown's funeral traders are very confused with how to perceive the market action in its schizophrenic emotional state.

We believe the stock market needs to consolidate for a few days. Yesterday's action was statistically very attractive. However there were still cracks that appeared such as low volume and underperforming semiconductors that demonstrates the market is not yet out of the woods. A pullback in here that does not go too far would be very healthy, especially if a little fear is introduced. Ideally we would like to see a large up day after a consolidation period that takes the market above yesterday's highs. The key thing will be that this hypothetical up day would contain significant volume and materializes within the next ten trading days.

Texas Instruments (TXN) reported a strong fundamental quarter despite the shellacking the stock is taking today. The largest complaint from the company was their inability to keep up with demand…a happy problem…no? Clearly the Semiconductor stocks keep tripping over themselves despite the companies showing improving fundamentals. The market skepticism is still at large, mainly due to the relatively weak performance in these Semiconductor stocks.

We continue to believe that the Semiconductor stocks will slowly gain respect between now and year-end. They will likely surprise traders by suddenly grabbing market leadership and not letting go. For now traders need to contemplate whether or not near-term gyrations are worthwhile trading or should be used for dip buying. Remember trading involves buying and selling full positions whereas dip buying involves simply adding exposure into weakness. Regular readers know that we will refrain from trading unless the decline looks like it is getting out of hand. We are comfortable with the NASDAQ as long as it holds above 2050-ish.

Consumer Confidence came in a tad weak but Home Sales were inline. Oil is bouncing which we consider a temporary positive for the S&P 500 (that will likely spill over into the NASDAQ). Stocks making new highs continue to increase over the past few days which further emboldens our Bullish view. In light of the fact that the market is not yet short-term overbought, the probability of this near-term consolidation period leading to another explosive up day is very high.

We continue to stay the course.

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