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The Bull Market Case

So Who's Right This Time? Part 2

Written by Brian Hicks
Posted September 6, 2007

Shoeless Joe Jackson: The first two were high and tight, so where do you think the next one's gonna be?
Archie Graham
: Well, either low and away, or in my ear.

Shoeless Joe Jackson
: He's not gonna wanna load the bases, so look low and away.

Archie Graham
: Right.

Shoeless Joe Jackson
: But watch out for in your ear.

--Field of Dreams

Dear Wealth Daily reader:

Today's WD is heavy with charts. My apologies.

But there's a set of charts at the end of this article that are downright frightening. So I urge you to look carefully at my analysis.

If you'll recall from Monday's WD, I laid out the bears' case for the market.

Today we turn to the bulls' case.

When I was studying at the Market Technicians Association in the late 1990s, the one golden rule that was drilled into our heads was and still is: the trend is your friend.

If we are to believe this market maxim, then we have to conclude that the markets are still in a bull phase . . . and the recent 12% selloff was your garden variety correction, and an excellent buying opportunity.

Yes?

Okay, let's see what the charts say.

There's no doubt that the American markets were bullish through most of July. The Dow made a new record high on July 17:

DJIA 10 Year

So did the S&P 500:

S and P 500 - 10 Year

And so did the widely-followed small cap index, the Russell 2000:

Russell 2000

The technical picture looks promising, but I have to admit that the possible head-and-shoulders pattern forming in the Dow and S&P 500 are of concern.

But Tuesday's rally did break above the downtrend line that's been forming ever since July 17:

DJIA 1 Year

Technically, this is promising too, but I would like to see more conviction to the upside before breaking out the rally hats.

After reading the charts, I would argue that the technical picture is neutral. Even though the bias is bullish, the immediate-term picture is still indecisive.

On the flip side, the fundamental picture for the markets looks very bullish.

The current P/E ratio for the Dow is about 15 . . . and on the S&P 500, around 10. Earnings growth for each is strong, nearly 20% and 15%, respectively.

So based on a purely EPS growth rate, the markets actually look undervalued. That's right, undervalued!

In addition to the growth rates for the markets, I love the fact that techs are beginning to surge.

And this is what really has me in the bull camp. Look at some of the names making all-time and 52-week highs in the past few days . . .

Garmin
Cisco
Micros Systems
Dawson Geophysical
EMC

It's high tech.

And then check out this recent story regarding venture capital funding in Silicon Valley:

Race for ‘next big thing' in Silicon Valley

By Richard Waters in San Francisco

Published: September 5 2007 20:15 | Last updated: September 5 2007 20:15

Silicon Valley's annual coming-out season for tech start-ups is about to turn into a stampede.

In the next few weeks, the wraps will be removed from some 150 new companies and products at a handful of events in California competing to identify the tech industry's Next Big Thing.

The race to find the Valley's hottest new idea reflects growing investor interest triggered by the high prices paid for recent internet start-ups such as YouTube, as well as the increasingly fierce Darwinian struggle among the newcomers to get noticed.

The large number of companies formed around hot trends such as web search, social networking and online video has added spice to the importance of the autumn events, according to entrepreneurs and venture capitalists.

The scramble for attention is another symptom of Silicon Valley's latest start-up boom. The amount of venture capital being invested in the US is at its highest level since 2001 and it has led to a rash of "me-too" companies.

With the housing market in full bust mode, risk capital is being funneled into the sectors that have lagged the commodity and housing bull market for the past five years. And that's tech and biotech.

It should also be noted, however, that one of the stocks in the above list--Dawson Geophysical--is a 3D seismic service company whose technology is used by oil and gas companies to pinpoint the best locations to drill. I recommended shares of Dawson on CNBC last September. Take a look at the chart:

Dawson Geophysical

My point is, Dawson's business is booming. Look at their revenue growth:

Dawson Revenue 

Currently, their trailing-twelve-month revenue rate is running at $233 million.

This bodes well for the entire oil and gas industry, meaning the energy bull market is still running at full throttle.

If my thesis is correct, we could be entering a period where both technology and commodity-specific sectors like energy move higher concurrently. And that should be explosive for investors.

A Pair of Twins You Don't Want to Sleep With

Now, I told you that many market pundits are saying this "feels" like 1987 . . . and that the markets are heading for a 1987-style massacre. I went back and did a five-year comparison chart for each period on the Dow:

1) Dow 1982--1987

Dow 1982-1987

2) Dow 2002--2007 

Dow 2002-2007

Uh, spooky isn't it? 

But this is even spookier:

1987: 

Dow 1987

2007: 

Dow 2007

These two charts are nearly carbon copies of each other. 

Will history repeat itself? Who knows? With everybody calling for a repeat of 1987, I doubt it will materialize. But looking at those charts, I'll take Shoeless Joe's advice: "Watch out for in your ear."

I continue to own the Ultrashort Dow30 Proshares (DXD). 

Sincerely,

Brian Hicks Signature

Brian Hicks

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