Two Sides of a Coin

As I look internally at the market this morning, I see two stories, or two sides of a coin to say.  Let me start with the bullish side.  The chart below is the NASDAQ to NYSE Volume Indicator, which after our adjustments to these volumes to take out some of the noise, is a speculation index.  The NASDAQ exchange typically is more of a growth index, and it includes many more pure equity and technology companies.  The NYSE is more conservative and includes many old-time, more staid issues.  When you compare the speculative (NASDAQ) to the conservative (NYSE), you get a measure of how the emotions are running.  These emotions typically fall into the "dumb money" category and a smart investor wants to go in the opposite direction.  Take a look.

In the latest data in the chart above, this indicator has just fallen to about 0.90.  If you look carefully, you will see that at the junctures where this level has been reached in the past, nerves were on edge and the market was very close to a very significant buying juncture.  Please note, we said "very close." 

Moving to the less bullish side of the coin... You can see in the chart below that as of last week, the year-over-year change in margin debt has moved up to 35%.

This is NOT the end of the world, but as you see all the past times where this has occurred, it does usually mark a juncture where more volatility ensues and opens the door for some meaningful corrections.

But in general, with such mixed signals as we've mentioned above, we continue to be very comfortable with the defensive cash reserve (that we raised earlier this year when Psychology deteriorated to P5 and the Value Line Appreciation Potential fell to its lowest ranking of ours), until both sides of the coin give a more coordinated response.

Don Hays

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