GARY K WEEKEND NOTES

Firstly, over the past few weeks, we have seen several famous pundits come out and state that the market was headed for a bear market. Not an ordinary bear market but a bear market in the neighborhood of a 50% drop.  They could be right. After all, we are the ones who have been saying we are in the midst of a big central bank-induced bubble. After all, we have never seen central banks keep rates negative and near 0% for this long. After all, we have never seen (depending on which abacus you use) $15-20 trillion printed in order to keep asset prices on the move. After all, all we have seen since the great easy money experiment, started by Greenspan, is booms and busts. You remember 2000-2003? You remember 07-08? You had better remember. But that’s not our point. Again. They could be right but they could also be wrong. So instead of worrying about it, do like we do. WATCH THE MARKET. It will tell you everything you need to know. Let’s just say the market just topped and we were going to go into a protracted bear market. We know several things have to happen. If they occur, we will know something is up. The first thing is a break below the all-important 50 day average for the major indices. So far, only the TRANSPORTS are in trouble. You would then have to breach levels as more and more names break support and more and more sectors do the same. For example, the DOW would first have to break the 50 day average at 21,760. You would then have to breach the breakout at 22,500. You would then have to break below support at 21,600 and then the longer term 200 day moving average at 21,500 and then break next support at 21,2000 and then…you get the hint. We do not have to worry about “the grand call!” Just know bear markets always have the same characteristics when they show up. We have studied every bear market in history and expect to be ready whenever the next one decides to show up.

Meanwhile:

Recently, we have been telling you the internals of the market have turned south. We say this knowing the Dow, S&P, Nasdaq and NDX are not even down 1% from recent highs. But again, underneath the surface, there are some issues. To repeat:

The TRANSPORTS remain weak, nicely below the 50 day average. We are not the biggest believers in the Dow Theory but this is always important to watch.

SMALL CAPS are again under-performing. Seems any weakness in the market is led down by the small caps.

JUNK BONDS remain weak. We continue to believe this is one of the most distorted markets out there as investors have very little in the way of risk-less income investments…so they reach.

On Thursday, there were more new lows than new highs on both the NYSE and NASDAQ. Quite amazing considering major indices have hardly budged. This just tells you internals have weakened.

REGIONAL BANKS remain weak. The good news is that the big names, while weakening, are still above support.

Only about 60% of stocks that we scan are in good mode here. This should be higher. The good news? 60% of stocks are still in shape.

Some of the sentiment indicators we follow are off the charts bullish. The percentage of bullish market advisors is up over 64%, the highest number since (dare we say) 1987. On top of that, insiders are now selling at a serious clip with very little insider buying. Sentiment in itself does not cause markets to go down but should be in your file manager.

So…a few complaints but again, major indices have hardly budged. On top of that:

While there have been a good amount of earning’s blow-ups, there have been plenty of gaps to the upside as well as many good reactions.

On top of that, ENERGY continues to act well but would now look for pullbacks. Energy was an anchor for the market for a good long while.

SEMICONDUCTORS remain strong but as about as extended as they come.

WORLD MARKETS remain strong with Japan en fuego. (See what central bank buying does!) Near term, we are also seeing pullbacks telling us a little caution here.

HOUSING remains strong with nary a pullback. This in spite of possible issues with the tax bill.

Other areas that remain in shape:

CONSUMER FINANCE, ELECTRONICS, GAMING, INSURANCE, INTERNET, MACHINERY, MANAGED CARE, MEDICAL EQUIPMENT and SUPPLIES, TECHNOLOGY (many areas), SOLAR, UTILITIES and now starting to see a bunch of REITs shaping up and breaking out.