Market Timing: Should You Attempt It?

Top 339. May 27, 2005 10:25 AM

» Normxxx - An Unusually Busy Summer?

An Unusually Busy Summer?

While it is always possible for the stock market to do just whatever it pleases, right now the market seems to be suggesting that this rally has some problems.

The VIX continues to challenge its 10-yr low...

While the SPX broke above its April high, it did so on a volume trend that continues to deteriorate.

Meanwhile the VXN established yet another new all-time low.

The NDX's ability to sustain its uptrend has been remarkable and just about every ounce of fear has been wrung out of that market.

Look at that price persistence! The NDX has been above its 10-dma for 19 straight days (out of the last 20 trading days)! And its 20-day rate of change has climbed above 9%! That's great, right?

Yet all of the 20-day sessions that have had a value of 19 or higher for the past 2½ years, with the exception of the November-December '04 rally, have seen very tradable drops.

The 20-day Rate of Change usually does not exceed 10%, and when it does, rarely by much (as noted, it is already above 9%).

Now, add in the extreme low level on the Equity Put/Call Ratio...

...and it looks to me like the market has a high likelihood of developing a bad cough and will cough up some more gains about here, but if precedent is our guide, its not likely to drop too sharply. It's just having trouble getting back through the 1200 - 1220 area.

Still, as far as I can tell, the wider community of market mavens is pretty subdued. And why not? The market has been struggling all year-- now nearly one-third over-- and we are now into the summer 'dead' season. There's a lot to worry about, and there are undoubtedly major structural issues with the U.S. and global economies that will have to be addressed at some point. But who knows when that point will be reached? Getting the timing right on these big macro calls is the hard part. I actually think that the market is now setting up to relentlessly squeeze every last bear into submission.

If you look at a weekly chart of the S&P 500 Index (SPX), you can make a great case that this last down move-- the one that made everybody so bearish-- was really just a typical retracement before the markets head higher.

It's really common for a market to come back down to revisit the spot of an important breakout. This happens all the time. Yet, for some reason, this latest weekly move back down to visit the spot of the "election breakout" last October has really put a damper on the bulls. But this is a very typical pattern before a market turns around and surges again to the upside.

Okay, we may not 'surge,' just meander, upwards.

<img Align="Right" src="http://www.marketwatch.com/news/image.as...">If you haven't been following the sentiment indicators, I can tell you they have shown quite a bit of negativity among market participants over the past few months (that's bullish). (Though the mavens are still unseemly bullish-- which is bearish-- see Hulbert's ranking to the right. Hulbert: "When we contrast the stock market's current level with where it stood on March 15-- the last time the HSNSI was at, more or less, today's level, it turns out that the Dow Industrials on that day closed at 10,745-- more than 200 points higher than where it closed on Monday.

"Contrarians no doubt would differ over whether these brewing storm clouds are sufficient reasons in and of themselves to reduce equity exposures.

"But they undoubtedly would all agree that it will be very crucial to see how advisers react to the stock market's next correction. If they are quick to jump back on the bearish bandwagon, then the rally's sentiment foundation will once again become strong.

"But if they are hesitant to reduce exposure in the face of that correction, then the contrarian forecast will be for a return of bad weather.")

The April 20 low marked the extent of the major price damage. Next on the agenda was a (successful) retest of that low, in keeping with the 40-week cycle low due past the Ides of May (although the last week in May is historically strong). We have a bottom time window for June 1-6. The main part of the rebound out of this low should occur after the June 1-6 bottom, but early birds will want to be aboard as of any oversold reading next week or the following week, especially next Tuesday. (Bonds appear to be resurging in spite of economic news, but that will likely change once stocks make a bottom and begin to rebound. Gold prices should also follow the stock market up. But DO NOT confuse that gold bounce with a new uptrend.)

On the weekly SPX chart, a break over the recent highs in the 1230 area will be extremely important. Although I do think the final run to the high of this cyclical bull market will be starting shortly (possibly by the Ides of June), we won't really know that it's underway until this 1230 area is breached on a weekly close. But if that happens-- and I think it will-- then things could get really interesting to the upside.

If we see a decisive break above 1230, then we could be looking at a 100 - 150 point run before this bull market flames out. And the usual high-beta stocks should do well in any such scenerio.

The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

-- posted by Normxxx

http://www.martincapital.com/analysis.htm

Top 340. Oct 30, 2005 7:33 PM

» BoltonCT - Evidence and ANN forecasts- better than Bob

Here is a collection of information that might help non-market timers avoid being long in the wrong investments at this time. Unless you time and can move in and out quickly the stock market is now a hazardous place to be at the present moment because PEs are high and value is declining rapidly.

This site is one of my favorites.

This site shows long term rates bottomed in early July. It is not quite current. The long term rate recently began accelerating.

http://www.martincapital.com/chart-pgs/C...

I like this next site though I don’t believe the values but instead look for the trend. Make sure you scroll down to see the tables and the charts.

http://www.forecasts.org/30yrT.htm
The predictions are done with artificial neural networks (ANNs) which are comparable to Bob Brinker steering his car looking only in the rear view mirror. But these, unlike Bob, tell it like it is. Bob thinks he has the power to single handedly keep the market up just by talking it up.

There are many interesting forecasts. This next one implies the yen will strengthen next February something favorable for investing there.
http://www.forecasts.org/yen.htm

But this next one says the Nikkei will drop anyway.
http://www.forecasts.org/nikkei225.htm

This next one illustrates a very important principal; valuation. The S&P valuation index is something every market timer should understand. This is classic financial analysis which we should all know.

http://www.martincapital.com/chart-pgs/C...

The rapid fall off in the valuation index is primarily due to the rise in the rates of low risk securities such as treasuries and I-bonds. That value is outstripping the value of total return in the stock market. The collapse in stock market value will continue as long as the Fed continues to hike the rate.

The audience of Bob Brinker is just beginning to find themselves in a house of pain. True, in the past year the long term rate decreased but now they have seen four months of increasing long term rates (second website) and real financial pain. One investor who called in said he was getting 5% interest in long term bonds. He will see his capital fall 40% when the long term rate pops up 2% to the historical risk premium. He will then be locked in at 5% just when rates could easily rise to 7% to 9% before his bonds mature. But Bob Brinker did not tell his listeners that today. Bob must know the long term rates will rise explosively when bond holders realize Bob has been wrong, dead wrong ignoring this fundamental financial principal.

The shock of the coming bond market panic coupled with a contracting real estate market means a stock market squeeze... not new cash flowing in from real estate and bonds. Jim Cramer must have been in the ozone when he said that real estate money will come back into the market. That is just real estate credit; linked to inflated RE prices not money and it will disappear as soon as the prices decline. Homeowners with 90% mortgages will be wiped clearly out by a 10% price decline. Banks will not even get their money out and if the past is an indication, within three years the banks will have another crisis.

But this is nothing new and should not be disturbing to anyone who has seen it happen before. We do not want to be long in real estate, bonds, or stocks right now. So when will Bob Brinker tell it like it is? The stock market peaked in early August. If Brinker waits for the contraction, that would typically be six months later or in January. A contraction in capital does not necessarily mean a hard economic landing. Recessions occur less than half the time as stock market shaking monetary contractions in recent history. But the point is we are in a time when it is not worth the risk to be long in stocks unless you are a good market timer.

These sites all agree with me that the stock market is no place to be long in since August.
http://www.forecasts.org/stpoor.htm
http://www.forecasts.org/nasd.htm
http://www.forecasts.org/r2000.htm
http://www.forecasts.org/w5000.htm

I have not looked at these sites for at least 6 months. The last time it was way out of date but this time it was good. Make sure you scroll down to see the tables and the charts. I hope you enjoy it and don’t go long just yet.

I am no advisor. I only say what I am doing because I don’t see how it can hurt and what I say cannot affect the market anyway. However I suspect Bob actually believes he moves the markets.

I believe that if I was given the task, and the SEC gave me access to the records of individual market trades… I know how to very accurately predict the market moves and how to detect market manipulation. That cannot be done using averages which can be easily manipulated. That is why I got concerned a month ago when someone poured money into a few stocks in the last ten minutes of what Kirk called a quadruple witching Friday, and caused several of my indicators to give false buy signals... which I had to correct.

-- posted by BoltonCT

Top 341. Nov 1, 2005 7:44 PM

» BoltonCT - Sell, Sell, Sell, Sell, Sell

My five American market cash flow indicators continue to flash sell. Each 0.25% Fed rate hike makes the stock exchange significantly less attractive. We are now seeing volume dropping and when that happens that means the market is about to drop.

-- posted by BoltonCT

Top 342. Nov 3, 2005 7:42 PM

» Normxxx - Not a Market for Investors

Thursday WrapUp: Not a Market for Investors and a Tough Market for Traders

By Martin Goldberg, FSO | 3 November 2005

To those of you are enjoying this short term rally, congratulations. With an appropriate level of risk to my wealth, so am I. Yes, in some instances I held my nose and bought. The logical turn of events would be for the rally to carry the indices to new 52-week highs. This would be sufficient to put the stock market in positive newspaper headlines and TV news one more time this year. This will serve to keep John Q. Public’s monthly allocation flowing into his 401K stock market mutual fund account blindly, while corporate executives continue to sell out equity stakes in their companies. This is all occurring in the backdrop of all-time trading volumes resulting in a multitude of hedge funds all trying (mostly in vain) to squeeze a few pennies out of stocks moving from hand to hand like a shell game on a New York City sidewalk. In the mean time, many of the public continue to fancy themselves as modern day Rockefellers or Buffetts— savvy investors, all as their hard earned savings plow blindly into their 401K plan and E-Trade accounts. Bou-ya, Jim! Yet the stock market has gone virtually nowhere in almost 2 years.

While my long-term gold and silver and corresponding mining shares are acting well, I’m not mistaking the fact that they are all underperforming Google. I don’t buy the premise for which the market is valuing this internet company at well over $100 billion; but make no mistake, if I felt it could go to $450, with a minimum of risk, I’d be in and cheering like seemingly everyone else.

This trading range stock market is making me weary. With rallies and swoons that have been almot too quick to be tradable, no directional trend has developed. Most market technicians seem to believe that the market will drop to significantly lower levels, but the time in which this will happen is now too far out to be relevant in any practical sense. That is to say, it will be at least three weeks or more into the future. In the same manner, if the market were to rally to new bull market territory, first it would have to move into new high ground, and this too seems unlikely. Yet given the action in the Dow Jones Transportation Index, anything is possible. The people who are bidding up the transports are not doing it for the 0.6% dividend (nor do I think they are anticipating a return to $30 oil).

I will describe two recent examples of successful bearish positions on my part to illustrate the difficult nature of the current market. I sold short Autozone $97.86, and then saw it move to all time highs over $100 on a Smith Barney upgrade. It then swooned on lousy quarterly earnings and a CFO resignation. When the market appeared bullish, I covered at $82.78.

I sold short PF Chang’s China Bistro at $51.25. Their quarterly release included disappointing sales and earnings, a (another) CFO resignation, and a stock drop of over 10% in a day. At that time, I thought I really had a long term position in an overpriced stock in an overpriced market that was finally getting a sniff of reality. This proved to be a mirage as three days later (last Monday), I was stopped out of my PFCB short at 46 in a stock market rally that included practically all stocks— good, bad, ugly, and extremely ugly. In both cases, a strong market required that the short positions be closed out. As I draft this, AZO is at $85, and PFCB at $47— both marginally higher than my cover price and both minus their CFOs. They are both good short sales in my view except for one factor— market conditions. At this moment, taking a bearish position would be lagging Investors Business Daily, and for over a decade, this has been a losing proposition. Even though it has been tough, but not impossible to make money on bearish positions, the environment has been similar for the bulls (except for those bidding up such household beloved favorite stocks as Apple Computer, Sandisk, and Google).

As I’ve stated here before, there is opportunity in the short side of US consumer related stocks, and I believe we are in a bear market now. But we are in the midst of a sharp and tradable rally and the environment is risky. Now it is just a question of entry point which has not come yet except for an opportunistic and short term trade here and there. The long term monthly candlestick chart of the Retail Holders ETF puts it in perspective. There are a few things I would like to point out about this chart.

As you can see from the chart above, the Retail Holders index has had a decisive engulfing pattern (the tall red candlestick) in August of 2005, which reversed the uptrend. Note how the July white candlestick occurred on low volume and was reversed downward on high volume. It was also in August, that the March 2002 highs in the RTH index (~98), also failed. The 98 level also failed in November of 2004. If the retail index were to break above 98, and remain there for over a month, then this may cast doubt on whether we are in a consumer stock bear market. I’ll believe it when I see it, and if I see it, I will believe it.

Now I would like to chop up what I just said so that the situation may be viewed with an open mind. It is relevant to note that none of the momentum indicators referenced in the chart above is of value except for providing a warning that says “watch out.” Even though various indicators point to momentum divergences, momentum is just that— momentum. As with trends, momentum can be reversed; actually momentum is reversed much more easily than trends. I’ve seen too many letter writers, myself included, fall into the trap of making a fundamental point via reference of momentum indicators only without any confirmation in trendline breaks or pattern reversals. If a fundamental point is to be made using charts, you need to come to me with something more than a loss of momentum. Show me a decisively broken trendline— nothing less— then I may believe your fundamental point made with charts. If you ever catch me doing this, write me and I’ll send you a full refund, no questions asked!

So are we in a bear market in consumer related stocks? A look at the long-term Dow Jones Restaurant and Bars index suggests a trading range is the more appropriate term.

Bear market, may be. The charts of many key consumer stocks appear to be damaged, yet they have surged back recently with sharp rallies. And yet, you cannot ignore that the level of technical damage done to these charts cast doubts on the sustainability of the recent rally. Homebuilders serve as an excellent example. Following is a three year weekly chart of Toll Brothers. While the chart appeared to be damaged with a deep and sharp sell off of its high at about 58, the damage was at least temporarily halted at the “4” marked on the chart. It would appear that the likely scenario would be the formation of the right shoulder of a head-and-shoulders reversal pattern. While this may be plausible, the pattern would not be validated until 36 was decisively taken out to the downside. (Maybe there is no housing bubble after all!) A decisive break of the proposed neckline would do a lot of talking about whether the housing bubble was bursting. But until that happens, there is not a bear market yet.

The Dow Jones Transportation Index serves as an example of how difficult this market can be, and why patterns need to be completed before they may be considered meaningful.

There are some lessons to be learned on this chart. Remember the head-and-shoulders pattern proposed? Having proposed this pattern in a market wrap up (twice), I surely remember it. The proposed pattern could not be validated until the proposed shoulder was broken to the downside. All the bearishness suggested by the plunging neckline was not to be until the neckline was broken. In retrospect, the proposed right shoulder may have been a 3rd Elliot Wave (as indicated by the momentum at the top and extension). Such a formation would have indicated more significant upward movement in wave 5, which did not occur in the proposed head (H), or proposed right shoulder (Sh). Whether this is a proper Elliot Wave count is pretty much immaterial for practical purposes. The important point is that the bearish pattern was not validated by a break of the neckline, and therefore any suggestion that the transports were in trouble would have been (and is) premature.

There will be opportunity to make money with bearish positions in consumer stocks, but not until the market turns decisively bearish. We don’t yet have a support break in PFCB, but once (and if) we do, there will be a profitable intermediate term trade as can be seen in the long-term weekly chart. Forty ($40) is a key support/resistance area for PFCB. Once 40 is broken decisively to the downside, the stock should travel downward to 22 (where there is some support) or lower.

Today’s Market

All major averages were up again today led by the Dow Transportation Index which moved into new high ground and the Nasdaq 100 (QQQQ) which was up about 1.5% today and approached its resistance point of 40. On the individual stock front it appears that the stocks showing the most momentum were up the most today. Sandisk and Apple Computer were up over 3% and GOOG was up over 1.5%. The stock market indices are heading up, and so are long-term interest rates. In the near-term (say, 3 weeks) this is not important. Yet longer term higher interest rates will douse the flames feeding the US consumer frenzy. Before this happens, we will get the convergence of lower oil (assuming the short term trend stays in place), and a stock market that reaches high ground and makes the news. And as it stands, it appears that this will all happen during the Christmas shopping season. It’s one more party for the consumer feeling wealthy, while the real economy continues to languish.

The bond market sits at a critical juncture as shown in the 3-year weekly chart below. While a downtrend has been broken, it is just below where you could call it a decisive break. If the 10-year note rate goes above 4.85%, that would be a multi-year high, and if it reaches 5.0%, this would be a number that would make the news and wake up the average citizen as to the upward trend in interest rates. In previous instances such as April of '04, and early Spring of '05, upward trending rates produced a stock market swoon. This time around, interest rates are heading higher while the stock market rallies. If interest rates head higher still, it will eventually hurt stocks; that is, if history is any indicator. It is notable that 10-year interest rates have continued a trend of higher lows since June of '03, almost 30-months, which is the longest duration since the secular bull market in bond prices began.

The chart below adds a long-term perspective.

Finally, that brings me to gold. After a bold advance, gold is consolidating at about $460 per ounce. If gold approaches $500 an ounce, this will also awaken the general public to the obvious fact that there is serious inflation in the pipeline and this will shed a negative light upon those officials who site official statistics as evidence that inflation is benign. There is credibility at stake, and if credibility is lost, that would have a negative effect upon the financial system, and the economy propping wealth effect. For that reason, I would think that whatever can be done to keep the price of gold down, will be done. It will probably remain in a base until after Christmas. After that, gold would likely head upward in my view.

Enjoy the stock market party while it lasts and have a great evening.

______________

The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

-- posted by Normxxx

Top 343. Nov 4, 2005 10:06 AM

» Normxxx - Friday, 4 November-- Interim

Friday, 4 November— Interim

The S&P 500 Index (SPX) seems to have clearly left behind the bottoming zone at 1175, and is firmly launched on a rally effort above 1210 (trading zone: 1210 - 1245).

The move up over the past 5 trading sessions is excellent behavior for a fledgling uptrend, and it provides a massive confidence boost that the upside will extend to new highs over 1245, most likely making it all the way to 1280 - 1300. If anything, those targets may be a bit low, as the SPX could extend further into the 1300's if the circumstances are right, and additional energy (new money) comes into the upside pattern.

Right now the charts are predicting a pause in the upside over the next 3 to 5 days. This doesn't mean the market is about to collapse back down; rather, it means the period of trending, linear price movement is going to end, and a period of drifty consolidation is going to start. I think we have seen that consolidation period begin as the SPX topped out at 1224 on Thursday.

Nevertheless, despite another good day in the broader market, many of my more intermediate-term measures didn't quite make it into overbought territory. The story really hasn't changed at all...things still look OK for higher prices in the coming weeks, but we're not expecting anything outrageous to the upside. Many of my ST indicators are already flashing caution signs, and if we continue higher those signs will only grow, adding to the risk of establishing and holding long positions.

This probably means the SPX will now trade around the ~1220 area as a temporary equilibrium point; that is, sometimes prices will be above this level, and sometimes they will be below. Once enough traders are convinced that the averages are not about to move sharply lower immediately, the SPX will be ready to embark on the next trending move up. (At which point most of the ST indicators should have settled down.) My guess is that that won't be before sometime next week, and the averages may even drift back down a bit until that gets going.

At this point, the bullish case doesn't need much help. It's doing very well. Any consolidation period over the next few trading sessions could be used as an opportunity to add more long positions, for the continuing move up.

Since the downturn began in August, the major indices have been unable to get their 6 Day RSI above 70. We are currently there- so the strength of this rally is about to be tested. When the market is trending upward this indicator tends to remain above 50. In a weak market, this number tends to gravitate below 50. A break below 50 would reassert the we are still stuck in the two year trading range.

Still, there is also some need to maintain safeguards against potentially serious downside action— 'though right now I tend to believe this would be nothing more than a test of the neutral as the trend seems definitely to the upside.

But remember, we are on very thin ice— the risk out there is near astronomical— and any major geopolitical or financial "accident" could send the markets into a major "swoon."

Anopther caution flag: mutual fund managers are holding yet another record-low amount of cash (which means [a] they may have to sell shares to provide for redemptions in any market plunge [thus aggravating it], and [b] they have little or no funds to 'add' to the market, even on pullbacks.)

The Investment Company Institute, a mutual-fund company industry organization, revealed that fund managers reduced the amount of cash on hand yet again in September, the 8th consecutive month with either a flat or declining level of liquid assets. That latter is not bullish, though this is somewhat counteracted by the still high levels of short sales (which is bullish).

From the end of February through the end of September, the S&P 500 was able to tack on a meager 25 points, yet U.S. mutual funds added $300 billion in assets to set a new all-time record. Despite that gain in assets, funds were actually holding $8 billion less in cash in September than they were in February.

When cash on hand is adjusted for the level of short-term interest rates, a primary driver of fund cash levels, I estimate that funds were holding about 1.6% less cash than they should have been in February, but 2.5% less than they should have in September. Somewhere around 2.25% or so can be considered an extreme deficit, though the shortfall was close to or greater than 3.5% in 1981 and 2000.

There are many reasons why we could be seeing a lower range in the level of cash at these funds. The rise of derivative markets (and their availability to fund managers), and the domination of index funds which prohibit managers from market timing and raising cash are two of the biggies and will likely help to push these cash levels lower over the years. Because of those reasons, even though I believe this data gives cause for concern longer-term, it's not a reason to panic...yet.

Trader (COTs) positions in the U.S. Dollar are at their most bearish for the greenback ever. By that, I mean that large commercial traders (aka the "smart" money) has its largest net short position in history, while trend-following speculators (aka the "dumb" money) have their largest net long position ever. By contrast, the configuration looks much better for the Japanese Yen, British Pound, and Swiss Franc.

But note that (barring "accident") the dollar is likely to remain strong as long as the U.S. Fed continues to raise rates (at least until January?) and hardly anyone else is. FWIW, the dollar is again trading around its peak of early June. There is nothing to stop it from breaking through and trading at least up to its peak of 92 around May of last year.

Still, past extremes in these positions were relatively good at highlighting turning points in the dollar (not perfect, but what is?). So let's just assume for the moment that this is a bad omen for the dollar and it will put in a top somewhere around here.

Past peaks in the dollar have benefited gold stocks, consumer non-cyclicals, insurance and utilities.

The best performers included gold stocks (such as NEM), consumer non-cyclicals (PEP, K, MCK), energy (APC, BR, BJS), certain insurance issues (PFG, AFL, AET), and utilities (CNP, DUK, TXU).

The worst performers included chemicals (EC, PX, EMN), consumer cyclicals (BDK, HDI, JNY), and specialty retailers (DG, EBAY, BBBY).

Please understand that that this list of stocks is a starting point for further research, and not a recommendation to blindly buy or sell. I am merely indicating what could happen, assuming the dollar will decline based on a single piece of evidence, and assuming that past patterns will repeat in terms of which stocks benefited and which did not.

We now have a situation which historically has meant that the stock market downside was limited going forward, and it generally did not pay to stay short the market. So we have decent conditions for a long trade, and I will act accordingly.

But I will never neglect to determine my exact exit strategy should the market go against me, before ever I buy; and I will never neglect to execute it, if needs be!

______________

The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

-- posted by Normxxx

Top 344. Nov 5, 2005 7:36 AM

» BoltonCT - Market is still slip sliding along

I went back and tried my best to tune my five US stock cash flow indices to give a buy signal now but could not do so without markedly reducing their predictive accuracy. For instance the NASDAQ history I use starts Oct 11, 1984 has 27 transactions and shows 991% profit (excluding commissions) over the period. To have a buy signal at this I had to lower the buy threshold increasing the transactions to 36 and dropping the profit to 930% (excluding commissions). All the indicators had a similar type of problem. For the NASDAQ, to have a buy signal now the transactions increased 33% and performance declined.
The market is slip sliding laterally at present. The current market rally would have to be twice as great as it is to bring this correction to a conclusion. But already the market is approaching overbought and is ready for a downward correction.

On the other hand, at least one more downward correction would be needed over a month period, or a lateral movement over about two months, in order to bring this current correction to a conclusion.

A more realistic expectation is that there is a bull market trap forming. Coincidentally many technical barriers were broken Thursday including the NASDAQ barrier at 2140. It stopped at 2140 Wednesday and then gapped to 2160 Thursday. But that triggered no interest and it stayed there Friday doing nothing. The lack of follow through after a technical breakout indicates that a bull trap has very likely been set.

-- posted by BoltonCT

Top 345. Nov 5, 2005 12:16 PM

» Normxxx - Re: Market is still slip sliding along

In response to Market is still slip sliding along posted by BoltonCT:

A more realistic expectation is that there is a bull market trap forming.

I'll buy that! But, I think our current rally must play out (at least until 1245 or so), before the trap will be sprung!

Then, when everyone is thinking 1300 and loading up while the averages start a 'gentle retrace...'

We still have too many bears and a huge 'wall of worry' here.

Anyone know if Don Hays is loading up yet?

On the other hand, at least one more downward correction would be needed over a month period, or a lateral movement over about two months, in order to bring this current correction to a conclusion.

Wouldn't be the first time that a bear move was 'aborted' in order to front run a 'bull trap.' Those panicked bears (and over-eager bulls) are fodder for such moves.

But, so far, my indicators do not seem to be saying "bull trap." But, the hallmark of such moves is that they tend to 'blindside' most indicators.

Am I right that you are monitoring net foreign money going into U.S. equity funds?

-- posted by Normxxx

Top 346. Nov 15, 2005 4:46 PM

» Normxxx - Year-end rally for no good reason

Contrarian Chronicles
A year-end rally for no good reason

by Bill Fleckenstein

The much-anticipated year-end rally may happen, but it's merely the calm before the storm. As the housing bubble dissolves and the economy slows, watch out in 2006.

As 2005 winds to a close, I have been wrestling with a question: Whether or not the market can hold together for the rest of this year— leaving the serious business of "the next time down" an issue for 2006. In the face of that unknown, I must look to seasonal market psychology for clues.

Bulls have been feeling pretty bulletproof due to the combination of the "calendar" and what I refer to as the "no-news period." Let me explain the latter— and how it works into the equation of what the rest of this quarter and calendar year might look like.

Lifecycle of the corporate-spin cycle

Most companies in America are on calendar quarters. In the case of the third quarter, by the time October was finished, we had heard from pretty much all of them. We won't really hear anything further until early December, when we get the mid-quarter updates. Next, we get whatever preannouncements are going to occur. Then in January, we hear from the companies about the fourth quarter.

So in essence, the news period starts roughly with the last month of the quarter and runs through the first month or so of the new quarter. Said differently, the no-news period is the month in the middle of the quarter. (Obviously, this is not precise. Sometimes, due to the way the quarters have aligned vs. expectations, the no-news period can be longer. Also, it isn't strictly a no-news period. It's just a diminished-news period.)

Vaporing thrives in a vacuum

Why does that matter? Because even though most people who operate on Wall Street are adults, they seem to want to believe in childhood fantasies— witness them describing the economy as a Goldilocks economy and planning for the Santa Claus rally and assorted other dreams.

When I got into the business in the late 1970s, this sort of brazen naiveté would have wiped you out in short order. By my reckoning, individual stocks figured out (or discounted) the news long before they seem to do so today. I attribute this to the fact that people have made so much money basically ignoring all forms of bad news since roughly the mid-1990s that they have invented new rules. (Yes, we did have a nasty 18-month period after the bubble burst. But, as one can see by the craze that's shifted into housing, that sell-off seems mostly forgotten.)

In any case, combine the no-news period (which November essentially is) with folks' belief in the Santa Claus rally, and you have the dynamic for a big rally— if there is the money to do so (meaning that folks haven't already made the bet) and if what news there is cooperates.

The writing on the drywall

Last Tuesday was an example of the news not cooperating, as Toll Brothers (TOL) was forced to take guidance down for next year. The company's stock declined about 14%, with every other homebuilder hit for 5%, plus or minus. (It is worth noting that since last summer, insiders— continuing to wax poetic about their business prospects— sold more than 3 million Toll shares, at an average price of approximately $51.)

Anyone who's read the Contrarian Chronicles for any length of time knows that this is just another data point signaling the demise of the housing ATM and, as a consequence, the consumer and the economy running out of gas. What we don't know is:

At what rate the process will unfold.

When it will be recognized and acted on in the stock market.

A potential sign of that recognition: last Tuesday's 3% decline in the shares of Best Buy (BBY), a prominent beneficiary of consumers' spending spree, financed by you-know-what.

I may be making way too much of the dots being connected. But dots will have to be connected about what the demise of the housing ATM will mean before it can collectively mean anything. So, along the lines of what I said earlier, one of the things I'm looking for are signs, outside of the housing stocks themselves, that folks are figuring out what the demise of the housing ATM means.

End-of-year rally or trap?

Back to my original question about the market's path into year-end: I still find it hard to believe that all the people who've made the calendar/no-news bet are going to get paid this year— though the weight of their sentiment may suffice to keep serious downside action at bay until next year. If so, we might just see a giant flop-and-chop for the rest of the year (with the averages finishing plus or minus a couple percent).

Of course, even if something like that scenario did play out, it doesn't mean there wouldn't be a handful of stocks that might go up a bunch and a handful that might go down a bunch. Again, this is only a near-term scenario, as I continue to be completely convinced that the next move of any consequence will be lower. However, when you're speculating on the short side, as I do, getting the timing right is crucial.

The Next Time Down

I have been in the money-management business since 1982. Since 1996, I have run a short-only hedge fund, been a director of Pan American Silver, and written a daily market column on the Internet. That column, and a copy of this talk, can be found at Fleckensteincapital.com. As I clearly state on my Web site, my personal motto is "Often Wrong, Never in Doubt." With that disclosure out of the way, I can get started.

Today I have a trifecta to share with all of you: a macro theme which I call "the next time down," a specific idea to profit from that theme, and, in the interest of evenhandedness, an idea that those of you who conclude I am dead-wrong can use, to express your negative opinion of my opinion.

I believe that the four years which have elapsed since the stock market peaked have essentially been one massive exercise in denial. Initially, folks were in denial about the fact that stocks had peaked and that we were in a bear market. Then, all of our economic and stock-market problems were blindly pinned on the attack of September 11, even though that attack wasn't the economy's true problem. The next excuse was pre-Iraq war fears.

Finally, the combination of the fall of Baghdad, 13 rate cuts (which heretofore had been not good enough), two tax cuts, two rounds of tax rebates, and the recent tax refund was potent enough to give us the year-long rally that recently ended, as well as a big bounce in the economy. However, from a stimulus standpoint, the government is out of bullets. No more tax cuts are coming, no more rate cuts are coming (though I think no more than a couple 25-basis-point hikes are coming, either).

But most importantly, the "use-your-house-as-an-ATM-to-live-beyond-your-means" stimulus is finished, thanks to the recent de-leveraging/crackup in the bond market. The refi game and the bull market in housing it created postponed the consequences of the largest stock market bubble in history. Though the Fed and the rest of the government succeeded in postponing the fallout from the massive misallocation of capital that took place in the mania, they have also succeeded in compounding and exacerbating those consequences. Even more leverage was created in the system, as we attempted to speculate our way to prosperity.

In short, the excesses from the bubble have not been cleared away, but they will be, along with the recent excesses from the refi bubble. I believe the economic rebound has peaked, the economy will slow down in the second half, and we will ultimately slide back into recession. I believe we are headed for a large slide in the stock market, as well as a resumption in the decline of the dollar. These developments will tend to be self-reinforcing, and especially damaging, if and when housing prices join the decline.

If that weren't bad enough, in addition, the Fed is finally trapped. Easy Al can't cut rates when trouble starts, because he has already created a decent-sized inflation problem. As this scenario unfolds, in whatever variation, we will experience the "next time down." The realization that the market is going down again, and with it the economy, will force people to come to grips with the fact that the interlude of the last year was just that. This will deal a crushing blow to confidence, causing the public to finally comprehend that the Fed can't save them. Once the business of clearing away the excesses begins again in earnest, your guess is as good as mine as to how ugly it all gets.

Though I run a short fund and recently became fully invested for the first time since 2002 (as I was fortunate enough to see last year's rally coming), my specific idea to capitalize on the debacle I see brewing is a long— not a short. I decided to go with a long idea for three reasons: (1) Managing a short position requires a lot of monitoring. (2) While you may make 50% to 70% on a short, you can make 200% to 300% on a long. (3) This long idea should also protect you when the dollar weakens.

My idea to protect yourself, or to profit from the potential damage I have just described is— buy silver or silver equities. One month ago, I was struggling to come up with an idea to suggest today. But the recent 35% collapse in the silver market created a topic for me, and an opportunity for you, as silver's downside from the $5.50 level is small and manageable.

The fundamentals of the silver market are briefly as follows: About 600 million ounces, or $4 billion worth of silver, are produced each year, while 800 million ounces are consumed. The market has been in deficit for 13 years in a row now, reducing above-ground stocks by some 1.35 billion ounces. (These stocks are currently estimated to be approximately 500 million ounces, or $3 billion.) Photographic demand comprises about 25% of consumption and has remained fairly stable, in spite of digital cameras, thanks to other photographic uses. In fact, Photofinishing News projects that more silver will be used in 2008 than in 2000!

However, the supply and demand data are not reason enough to own silver, though they do suggest what could happen to the silver price if investment demand picks up. The price rise could be truly explosive, especially when one considers the inelasticity of silver supply. Pure silver mines are rare, as roughly 70% of the silver produced is a byproduct of other mining. The bottom line: If demand heats up, there will be only a limited amount of new silver for quite some time— and, the central banks don't have any, unlike gold.

So what will create the investment demand? A change in psychology regarding the superiority of paper assets, precipitated by the ramifications in the financial markets of "the next time down." The demand for paper assets and dollars that we have witnessed in the last decade or so has been an expression of total confidence in the central planners at the Fed. If that confidence cracks, as I expect, and the dollar begins to be viewed as the Bernanke confetti it has become, demand for silver and gold will increase. Warren Buffett has eloquently articulated his bearish point of view of the dollar (and backed it up with $18 billion), so there is ample reason to be concerned about the dollar, even without the change in psychology precipitated by "the next time down."

Okay, so how can a guy who doesn't want to buy silver itself implement this idea? Since silver is a small market, and silver mining has been so difficult for so long, your investment choices are limited to about five companies, which all have different characteristics. One has serious base-metal exposure, one has serious gold exposure, one is pretty speculative, one has the most horrendous management I have ever seen, and then— bearing in mind that everything I have to say is 100% biased— there is Pan American Silver.

Since I am a director, it is not appropriate for me to be as opinionated as I otherwise would like to be. What I will say is that after being on the board for seven years, I believe it is an extremely well-run company. I don't know how many of you know Michael Larson, who manages Bill Gates' money, but he has been on the board for five years now, and he shares my opinion of management. John Doody, the best independent mining analyst, says that PAAS is the "best pure silver producer; with six mines soon, its profits will benefit most from a silver rise, as all others need two to three years to build a mine."

Earlier, I promised an idea for those who disagree with my analysis. For those of you, I would suggest shorting CDE, of which John Doody has written: "CDE stayed alive, issuing shares for debt, but despite diluting original holders by 90%, the company still cannot make a profit. Management continues self-aggrandizing ways, as 2003's corporate overhead works out to 87 cents an ounce produced! No wonder management owns few shares."

I thought I would conclude this brief analysis by comparing a few data points about PAAS and CDE (but for anyone wishing more detailed information, read John Doody at http://www.goldstockanalyst.com, or listen to Pan American's most recent conference call at 877-519-4471. The pin code is 472 6403.)

If all goes as planned, by the end of next year, both companies will produce in the neighborhood of 15 million ounces of silver annually. In eight years' time, Coeur d'Alene's production will have grown 60%, Pan American's about fivefold, with shares outstanding having increased nearly tenfold at Coeur d'Alene, versus 2.5 fold at Pan American. In other words, Pan American will have delivered almost nine times the growth in production, with about one-quarter of the dilution.

Meanwhile, the chairman and founder of PAAS owns almost 10 times as much stock, while getting less than 25% of the salary received by CDE's chairman. Yet, Mr. Market has valued PAAS at 50% less than CDE ($800 million, vs. $1.2 billion). For all you market-neutral people in the audience, perhaps a pair trade is in order. The next time down for stocks may be the next time up for silver. But even if you disagree with that, then you know what to do.

______________

The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

-- posted by Normxxx

Top 347. Jul 2, 2006 5:26 PM

» BoltonCT - Every American Market cash flow index says buy

Every American Market cash flow index I follow has confirmed the market has bottomed and cash is flowing back into the market at a healthy clip.

-- posted by BoltonCT