The No. 1 Reason to be Bullish
By Jeff Clark
June 28, 2007

If someone asked you in April to place your money in an S&P 500 index fund or a money market fund, which would you have chosen?

As anyone who has bet on rising stock prices in the past few months can tell you, stocks stink right now. The broad market has gone nowhere since April. You would have been better off putting all of your money into the money market fund.

I naturally lean bearish. It's not that I'm a pessimist or that I spend my days focusing on the negative aspects of the world. But, I've spent enough time exposed to Wall Street, and I've made enough bad investments to know that a healthy degree of skepticism is a valuable asset. And that skepticism has paid off quite well.

But it's hard to be bearish when the semiconductor stocks look so darn good...

I've been watching the semiconductor stocks for the past several months, and I've been arguing that if the sector can break out of its six-year-long trading range, then it will bode very well for the overall stock market. After all, technology stocks in general – and the semiconductor group in particular– tend to lead the market.

Last week, in the midst of a sharp decline in the broad stock market, the semiconductors rallied. In fact, as you can see from the following chart of the Philadelphia Semiconductor Index, they challenged the upper end of their trading range...

You have to be bullish on a sector that acts well when the rest of the market is falling. And you have to like the potential of a chart that's about to break out of a six-year-long pattern.

But after last week's action, the semiconductor stocks were overbought... I was actually hoping to see a pullback on Monday to relieve the condition and set up a buying opportunity. That's exactly what we got.

By Tuesday afternoon, the weakness in the overall market brought the semiconductor index back out of its overbought condition. And it set the stage for a pretty good turnaround – which we saw on Wednesday.

The semiconductor stocks are leading the bullish charge. That's enough to convince me that the path of least resistance is higher.

If you're a speculator, be careful about betting too heavily on the bearish side. The semiconductors are arguing strongly in favor of the bull.

Best regards and good trading,

Jeff Clark