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November 17, 2005

Pop Goes the Bull

The Nasdaq Composite today set a new closing high for the year with a whopping 1.5% rally. This move will come as no surprise to readers who took in last Monday's observation that the stock market is following the dollar. Although I do not see an immediate end to this rally, I don't believe an end can be too far off. Why? Take a look at these charts:

The Nasdaq 100 blew past its previous 2005 high nearly 2 weeks before the Composite and is now a cool 3% higher, whereas the Composite is now only a hair above its previous high. This difference tells me that the buying is concentrated in large-cap stocks. Many market gurus have recently attributed this rally to year-end tape painting by fund managers, and they might be correctÂ… fund managers are likely to focus their efforts on larger companies. However, the impetus to push the market higher has been given to them by the dollar rally, and, as I've stated before, I believe the recent spike in precious metals, also to new highs, foreshadows the end of the dollar's uptrend.

Now, there is no fundamental reason why the dollar should, by itself, support the market. This correlation is simply a product of current psychology. At some point in the near future either the dollar will start heading lower and drag the market with it, or psychology will change and the market will go lower on its ownÂ… or a bit of both. If you would like more info on why the market is likely forming a major top, please read Martin Goldberg's recent article on market valuation.

Today's action coughed up some big winners, not the least of which were the homebuilders. Centex tacked on another $3.50 to its recent rally, while Building Materials Holding popped $3 (the day after I laid out my bear case for the stock). The assertion that this rally is being driven by tape-happy fund managers is all the more supported by today's strength in the homeys, given that the Commerce Department released a very weak housing starts report this morning. As the cracks in the housing game widen, the homeys continue to rally, likely setting up one of the greatest shorting opportunities in oh, say, about 5 years or so.

Disclosure: Short BMHC


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