Latest Hornstein Capital Partners newsletter received on 5/11/10.

Below is the lastest e-mail I received on 5/11/10 from Hornstein Capital, a group I trust. Their address is 53 East 34th street, Suite 207, New York, NY 10016.

from: Hornstein Capital Partners
reply-to: edward@hornsteincapital.com
date: Tue, May 11, 2010 at 8:35 PM
subject: May 11, 2010 Market Update

Last time I wrote about two weeks ago I noted:

"I will have a complete in-depth report this weekend. However, I wanted to put out a quick note to state that odds favor we are embarking on our first intermediate correction since January of this year. Distribution days have now piled up on the major indices, and many leading stocks are about as stretched to the upside as I have seen in ages. In addition, many of the emerging and other world markets are breaking important support levels.

This is certainly not a time to panic if one bought leading stocks correctly and one has low cost bases in these stocks, so long as one is prepared to sit through corrections in leading stocks and new bases being built. However, after playing offense aggressively since the February 11 follow-through day, I am now playing some defense, coming off margin, and raising cash to prepare myself to better sit through corrections.

While there are no guarantees in the stock market, the signs are definitely pointing to an intermediate term correction similar to the one we saw in January of this year. This would be healthy given the run the market has had, and allow proper bases to set up again.

Lastly, the GLD (gold etf), which I discussed in my March 28 market update, looks like it is breaking out and ready to challenge its old highs."

By now the entire world is aware of what transpired last week, as this was the quickest 14 percent correction I have ever witnessed! What amazes me even more is the number of pundits and self-proclaimed experts that have come out claiming to have called the meltdown. Of course, many of these same people have been bearish the entire bull market and never called anything, but that does not stop the many bears to come out of hibernation to claim "I CALLED IT I CALLED IT". The fact is nobody called anything, and while I noted the market's clues that we could begin a correction-- never did I think we would have a day like Thursday! In any event, I will not delve too much into Thursday's action and will leave that to others . Instead, I will focus on the aftermath, and what the market is currently telling us.

First and foremost, the distribution days prior to Thursday's meltdown and the meltdown itself—unequivocally caused damage to the bull market. I would gather that many stocks and sectors have seen their highs for some time, and quite possibly for the bull market. As bull markets mature, more stocks and sectors generally go by the wayside and fewer names will lead the way. When the bull market began in March 2009, one could have thrown a dart at any sector or stock and made huge gains. Some 14 months later, the situation is quite different. Now that the bull market has matured, the tape is more split, as certain sectors and stocks continue to act well while others have probably seen their best days for a long while.

One can think back to the end of the 2003-2007 bull market for an illustration of how this process works. The market suffered a series of corrections in 2007 (February-March 2007 and July-August 2007). While the major indices and leading stocks went higher after those corrections, the corrections themselves damaged the broad market and laid the necessary groundwork for the eventually bear market that followed.

For example, the financial stocks topped out during the February 2007 correction, and the semiconductor sector topped out during the August 2007 correction. Nevertheless, the market powered higher in the fall, and leading stocks continued to show great gains until early November 2007. The later stages of a bull market can be very profitable, as we saw in 2007, and most certainly saw in 2000.

The operative question now is whether we are in the later stages of a bull market -- where we may get another rally or two that is more focused and narrow -- or whether the market is starting to roll over for good. For at least a few reasons, the evidence at hand suggests the former.

First, while a few leading stocks have probably topped for this cycle (i.e.- GMCR and PCLN), a fair amount of leaders have held up extremely well despite the market's carnage over the past few weeks. Indeed, leader BIDU did not even approach its 50-day moving average during the selloff, and hit an all time closing high today. Leader AAPL, managed to close above its ten-week moving average last week, and is sitting a few percentage points off all time highs. Leader NFLX may be forming a rare high-tight flag. Other leading stocks that have consolidated and held up well during the sell off include VMW, CMG, DECK, PRGO, CREE, APKT, NFLX, CSTR ,WYNN, VECO, SNDK, DNDN, and VRX. Simply stated, enough leaders are acting constructively to prevent one from turning too bearish on the market just yet. These leaders will hold the key for the market. Unless they break their lows from last week and come under distribution, they are likely to lead the market higher in the coming weeks.

Second, an astute tape reader will note that after Thursday's sell off, Friday's volume in many leading stocks was HIGHER than the volume seen in these stocks on Thursday, yet the stocks did not undercut Thursday's lows (Many actually held firm). This action can be considered reverse churning, and shows that the institutions came into the market to support these leading stocks (i.e.-BIDU, AAPL, NFLX).

Third, studies of past market cycles demonstrate that markets generally do not go from bull to bear overnight. As I described above, markets usually enter a distributional phase, where some leaders continue to work their way higher, while the market indices build broad tops over time. So, even if we have seen our highs in the indices, it likely will take a few months before the market really cracks for good.

Fourth, the Russell 2000, which is our leading index this year, retook its 50-day moving average. This is a positive development, and may be signaling that the rest of the indices are ready to do the same.

Fifth, various sentiments measures have turned as bearish as we saw during the lows of the last bear market. And, when I see CNBC run a special program entitled "markets in turmoil" it tells me the crowd has definitely turned most bearish. This is a positive development for the market, and has allowed it to work off the bullish sentiment we saw at the highs.

In conclusion, the market has attempted a rally, and a follow-through day in the next few days would signal that the uptrend has resumed. I would not be too concerned with the failure of most of the indices at their 50-day moving averages today, as this is normal given the quick snapback of the past two days. Despite all the negatives we hear every day and a few key stocks coming under distribution, there are still enough leading stocks that have held support to prevent an astute speculator from getting too bearish at this point. A follow-through day, coupled with a few leaders like AAPL BIDU PRGO and NFLX making new highs, would tell us the uptrend is resuming. Of course, if these stocks come under distribution again, and the indices break last Thursday's lows, all bets are off.

Finally, as I noted two weeks ago, the GLD was setting up for a move higher. Today the price of gold, along with gold stocks, broke out on huge volume. Both gold prices, and gold stocks are clearly in bull markets, and look poised to move much higher in the coming months.

This email was sent by Hornstein Capital Partners, 53 East 34th street, Suite 207, New York, NY 10016, using Express Email Marketing.