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Two Reasons to Stay BullishBy Jeff ClarkThursday, July 26, 2007 You don't often see days like Tuesday.
The Dow dropped more than 220 points, 90% of the stocks on the NYSE closed in the red, and 10% of listed stocks made new 52-week lows. The selling was pervasive. It started from the opening bell and fed on itself all day long.
To call it "ugly" is cliché, but it fits. Whether it stays ugly or not is another issue – and it's one worth exploring.
Let's take a look at the big picture...
For most of the past few months, I've been cautiously bullish – mostly because of the action in the semiconductor sector and the increasingly optimistic positions of commercial traders. While many technical indicators have straddled the line between bullish and bearish, those two have consistently signaled an imminent uptrend.
And they're still bullish.
As of last Tuesday, commercial traders – commonly referred to as the "smart money" – held the largest net long position since the stock market bottomed in March 2003.
It's normal for commercial traders to leverage up bullish positions when the market is in the process of forming a bottom (as it was in 2003). It is very rare, however, for them to be this long with the market at all-time highs.
The "smart money" isn't flawless, and we have no guarantee that commercial traders are on the right side of the market right now. But, given their track record, it's not too smart to bet against them.
As for the semiconductor stocks, take a look at this chart...
Two weeks ago, the semiconductor index broke out to the upside of its six-year-long trading range. If the breakout holds, this has enormously bullish implications. Of course, right now, that's a big "if." We had a false breakdown last summer, and it's entirely possible we're looking at a false breakout today.
For the time being, though, the optimists get the benefit of the doubt. The index has come back down and is now testing the breakout level. This is normal action, and the pattern remains bullish.
So, as long as the "smart money" is bullish and the semiconductors are acting well, it makes sense to stay long the market.
Best regards and good trading,
Jeff Clark
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