Ephphatha!

The Roman Catholic Gospel this weekend related the story of Jesus curing a deaf mute so that he could hear and speak. As he touched the afflicted man’s ears the command he used was the Aramaic word for “be opened,” ephphatha. The symbolism of course is that he wanted all men to be open to his word.

Reflecting on this concept of staying flexible to hear messages we might ordinarily tune out we can’t help but think how it relates to the market.

The last few weeks have been a struggle to stay invested as the market chops violently back and forth. We have twice seen ugly breaks that appeared to auger corrections, on Monday August 17th and again on Tuesday September 1st. And yet the first time there was no downside follow through and the market went on to post new highs. And thus far there has been no follow through to last week’s break, although the bounce back was on light volume and appears to be a bear flag.

But, we suggest, ephphatha!

There can certainly be follow through to the downside as market participants come back from summer holidays and volume returns with them. With the indices seeming to groan with every move higher and the limited progress they make when they break to new highs that would appear to be the smart money bet.

We are uncomfortable, however, with the number of people that are skeptical of the market here and for that reason and the dogged performance of many leading stocks, which we shall discuss, we believe we are at a juncture where the big money to be made is by erring to the long side.

Because it is a deeply liquid widely held institutional stock Apple (AAPL) could be the poster child in this regard. We suggested nailing down a profit in the stock a week ago Friday and who could blame us? The stock had run nearly 20% seven weeks after its break out, traditionally a time when an uptrending stock will correct. It had retreated from an intraday new high on a burst in volume further signaling that at least a short term top was in place.

But APPL’s action this past week was impressive. On Friday the stock made a 52 week closing high. The weekly shows a Three Weeks Tight pattern that O’Neil suggests is often a sign of higher prices to come and often a place to add shares to an existing position.

And the number of Chinese stocks that have held up well after ugly breaks with the Shanghai market on August 17th impresses us. Perfect World (PWRD), FUQI International (FUQI), Netease.com (NTES), E House Holdings (EJ) and myriad others have either bridged their gaps down, are in the process of attempting to do so or appear to have put in healthy consolidations and look poised to make the attempt. Few have simply sunk lower signaling more significant corrections are likely in their future. Longtop Financial (LFT) strikes us as perhaps the exception to the rule.

Most striking was the performance of Arcsight (ARST) on Friday. ARST is not a stock we would normally profile. It’s too thin for us, with a 50 day trading average of only $14MM. Thursday after the bell the company reported triple digit year over year EPS increases for the seventh time in eight quarters. And for the seventh time in eight quarters year over year sales gains met or exceeded 25%. The company also raised guidance.

It shouldn’t be any surprise, then, that ARST gapped higher on Friday and broke out of what O’Neil refers to as a sixteen week Ascending Base. But frankly we were surprised. Markets that are poised for correction don’t see stocks perform in this fashion. Rather in a correcting market they usually seize on one negative metric or another and sell off or see muted upside.

In spite of ARST’s raised guidance we felt the market would focus on their slowing “beats” and forecasts for sharply decelerating earnings. Analysts appear to have caught up to the company’s rhythms and after a number of significant beats they beat by just 1c this quarter. That should lend legitimacy to forward forecasts that see year over year EPS acceleration slowing to less than 20% next quarter and turning sharply negative the quarter after that. But the market cast aside those concerns boosting the price sharply out of its second stage base.

Ephphatha!

Today the Shanghai Composite, which we have been closely monitoring (see our last column), failed to “confirm” its rally attempt. In fact it put in an unattractive day, posting a gain but failing to hold onto a significant early gain, closing higher but well off its highs. While not fatal it often signals a period of consolidation ahead.

But that doesn’t detract from the cautionary signs we are seeing about becoming too bearish. We suggest being poised to take positions in stocks we shall detail on our companion blog should the market confirm our suspicions and lurch once again to the upside.

Ephphatha!