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Market Notes: Is Mean Reversion About To Kick In? -- July 29

Jul. 29, 2013 6:39 PM ETJNJ, URA, LEU, WWR
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With key economic figures coming out later this week, the major averages have been luffing on light volume. Today was a bull/bear seesaw ride with the bears having the slight upper hand. It appeared as if the market leading Dow Transport Index (DTX) was on track to close beneath 640 but either last minute (and I do mean last minute) short-covering and/or program trading reversed the downward slide sending it back above this support level. Whew! The bulls get to reign for one more day.

But is their dominance waning? Technically, it sure appears that way and as we've been saying, the market is already fairly valued at these levels. In fact, it's not easy to find sectors that are trading at a discount. Some banks and insurers are still attractively priced but their futures are tied to interest rates and the strength of the consumer. We should learn more about the status of interest rates in the Fed's rate decision and their minutes due out mid-day Wednesday. Unemployment has a direct impact on consumer spending and we'll know more about that when Friday's non-farm payroll figures are released. This week's market action will likely be a direct reflection of the reaction to these figures (the GDP number also coming out Wednesday will be closely watched as well) and we could see a lot of action in the volatility index (VIX) as a result. This week may be the week that decides the tone of the market for the rest of the summer.

Market Highlights: The short squeeze in uranium miners continues
The short squeeze in the two uranium miners USEC (USU) and Uranium Res (URRE), noted here on Friday, continued today with USU exploding by over 50% to $29 and URRE leaping by 28% to $5.32. Compare these figures with the 3.4% drop in industry biggie Cameco (CCJ) and you can see that the short squeeze thesis is probably based a lot more in fact than in hypothesis. Despite Cameco's slump, the uranium etf (URA) still was able to hurdle its $19 resistance level. (Cameco comprises 21% of the URA.) If the URA can continue to move higher, now may be a good time to start building a position in nuclear energy.

Is Johnson & Johnson getting overheated?
I'm starting to flag stocks that are trading either far above or far below their moving averages (I look at the 21, 50, 100, and 200 day moving averages) and noted that Johnson & Johnson (JNJ, $93)for one is getting into heady territory. In many dynamic systems it's regarded as a general fact that when a system strays too far in either direction, there is a tendency for it to move back in the other direction. This is known as a reversion to the mean and is something that traders and investors can use to tell if their stocks are becoming overbought or oversold.

Many stocks have been putting in new highs on a regular basis and many are starting to trade way above their moving averages. As mentioned, Johnson & Johnson is trading at an all-time high. With a P/E of 20, it's not overvalued but at 40% above its 50 day moving average (dma for short) it may be time to book profits or at least protect a long position. Today's put/call ratio on JNJ was 2:1 indicating that either the bulls are putting on protection and/or the bears are taking a stance. Either way, both the stock chart and the options market is flashing red on this one, so please take note.

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