Tradewinds for Monday February 4th

Last week we saw a continued reduction in the hurricane force winds that have been buffeting the market since the first of the year. This came much to chagrin of the doom sayers and secular bull aficionados. I can speculate why the market rose the way it did last week, but remember the mantra of "Don't Ask Why". We only care which way the wind is blowing now and for as long as we can reasonably look into the future - a few days to a couple of weeks at best. Remember when reading all those stories of doom that bad news sells papers, clicks on the Web and all sorts of advice on how to not lose your money. Well anyone that has been watching closely knows that while everyone is crying crocodile tears over the sub-prime mess and the collapse of housing, some smart people have been making a bunch of money as the financial sector and homebuilders have zoomed off their lows. I bet you a lot of those pundits of doom have been among those.

Okay, lets get on to the Tradewind forecast. The storminess has definitely begun to subside, but there are still dark clouds out there. All of the broad index still have significant headwinds, so caution is still the word. We are seeing more stocks and ETFs moving into calmer waters. Of the 80 securities that I track, 29 are either rated neutral or the favorable zone. Check out the graphs to the right. You see that moderate momentum is sky rocketing and the long term slow momentum has turned up nicely. The fast momentum gave a little head fake in the middle of the week, but is moving up nicely. Remember the first rule of momentum, a body in motion tends to stay in motion until something stops it.

The top rated stocks and ETFs, to no surprise see plenty of representation from financials and real estate. Also three of the broad market ETFs that I track, IWM (Russell 2000), MDY (Midcaps) and SPY (S&P 500) have joined the top tier list. Others in the top tier list are: XHB, RTH, IYR, XLF, IJR, SMH, CSX OI, ACAS, C. I am excited to see SMH on this list, because that just may mean that the techs are getting ready to catch fire.

My second tier of stocks and ETFs are as follows: GLW, EOI, GT DRYS, HERO, RIO, PCU, IYT, XLI EWJ, EFA, IGN XLK. I like seeing RIO and PCU on this list as it indicates a revival in the industrial metals. Once again, not something that you would expect if a big bad recession was coming.

I do not have any sell signals flashing for the securities that I track.

A note on my methodology. I use a combination of slow, moderate and fast momentum indicators. For this I use the True Strength Indicator (TSI), Fisher Transform, and Trix. There are others that you can use that would probably work just as well. The key is to look at momentum over multiple dimensions and timeframes (I look at daily and weekly momentum). I score the securities that I track and thats how I come up with these lists.