STRATEGIES

This is not the time to chase prices, which is especially dangerous with speculative margin levels reaching the point where they could add serious fuel to any downturn. Position yourself smartly, be alert, and take profits where you can, writes MoneyShow's Tom Aspray.

Stocks finished the week with nice gains, as even though the market was lower most of Friday, once again late buying pushed the major averages back into positive territory.

For the week, the ranges in some of the other world markets, like gold, were much more dramatic. The yellow metal was hit hard Friday, as expected.

Stocks spent most of the week responding to earnings reports, as there was little in the way of economic data. The new highs in the major averages were confirmed by the market internals, and the number of stocks on the NYSE making new highs surged to over 500, which was above the January high.

The financial networks almost appear to be showing reruns; many fundamentalists either argue for much higher prices or that the market is ready to fall off the cliff.

Traders continue to act skeptical without being too bearish, as the market has been finishing days higher despite early declines. Once we get the first strong down day, their attitudes are likely to change significantly.

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There was some data on margin debt last week that I found surprising. As of the end of March, investors had $379.5 billion in margin debt, which was just below the prior record of $381.4 billion set in July 2007. But is this something investors should be concerned with?

Twenty or 30 years ago, I think there was a closer correlation with speculative excess than there is now. For many, the interest rate on margin debt is lower for consumer loans, and the margin debt is also tax deductible. This can help to explain the 28% increase in margin levels over the past year.

As was evidenced by the plunge in gold prices, many traders were forced to sell their gold positions to meet margin calls, pushing prices even lower. So as you can see, it can accentuate a severe market decline. In my opinion, it is not a reason to sell, but is just another sign of the increasingly positive attitude toward the stock market.

Much of the focus for the week was on Japan and the continued weakness in the yen. The country's monetary policy is having a very positive impact on its exporters. Meanwhile, the US dollar has been gaining strength against many currencies. This has added additional pressure on the precious metals.

Some analysts are still taking the view that the move in Japan's Nikkei-225 and the yen is almost over. But a longer historical view might convince them otherwise.

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The monthly chart of the Nikkei-225 and USD/JPY only goes back to 1992, and does not show the Nikkei's high of 38,952 in December 1989. The downtrend from just the 1995 and 2007 highs is still above the market in the 16,000 area. It also does not reflect that USD/JPY made a high soon after the stock market peaked, at 160, nor that it traded at 303 in 1975.

The downtrend of the USD/JPY is now above 108, but a move this year to 125 would not surprise me at all. This makes the recent action look less impressive, though the length of the decline in these markets increases the odds that a major bottom is being formed.

I would expect to see a decent pullback in these markets in the coming months, which should present a much better buying opportunity than chasing prices at current levels. Prices right now are too far above meaningful support.

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Tickers Mentioned: Tickers: SPY, DIA, QQQ, IWM, IYT