AUGUST 8, 2005

Stocks did creep higher as I suggested in my last post, until they ran into weaker retail sales and higher oil. Bonds continue to be short and although the dollar did not get to 118 euro, I was correct in thinking it was about time to short the dollar.

Oil stocks have been the undisputed leaders, followed by homebuilders and retailers. So it should be. We are after all a consumption based economy. Financial stocks are the biggest sector of the S&P, and they have lagged badly. The higher bond yields and oil prices hurt 3 out of the four sectors very badly. Homebuilders look like they have finally topped out helped along by prodigious selling by insiders of course. The flat yield curve is hurting net interest margins and so the banks stocks got hit. The BKX looks like its broken down. Retailer's also were sold, starting with Target, the subject of a bearish Barrons article. The group sports pretty high PEs for such large companies in such a mundane businesses. Over the long run their sales growth can't run ahead of GDP. Just ask WMT. That leaves the energy stocks, and at least today they can't lift the entire market by themselves.

A few recent indicators have also become troubling. Sentiment, as reflected in the number of weeks that bulls have outnumbered bears at 145 is approaching its record of 152 weeks. Mutual Fund cash levels are at historic lows. Real Estate as a percentage of GDP is at a historic high. Insider selling is very high. The breadth divergence between big and small stocks is very wide. The current acct deficit at 6 1/2% of GDP is in no mans land. None of these are very good timing indicators, but together they do paint a picture of caution. We can't all get out the door at the same time.