Market Timing: Should You Attempt It?

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Top 335. May 21, 2005 8:42 AM

» Normxxx - INITIATION CLIMAX?

INITIATION CLIMAX?

By --Carl Swenlin | 21 May 2005

One of Decision Point's proprietary indicators is the Participation Index (PI). It measures extreme (climactic) activity within a short-term price envelope. When a large number of stocks are participating in a particular price move (up or down), we recognize that such high levels of participation are unsustainable and refer to it as a "climax".

There are two kinds of climaxes -- an initiation climax, which marks the beginning of a longer-term price move and an exhaustion climax, which marks the end of a price move. Both kinds of climax can be followed by some consolidation activity before the trend changes or continues.

On the chart I have marked three upside climaxes. With 20-20 hindsight we can easily conclude that the first two are exhaustion climaxes, but I have designated the last one, the highest PI reading in a year, as an initiation climax, although the jury is not in on that one yet. My reasons are that price has broken out above the declining tops line that has been in effect since January, and during May UP Participation has expanded significantly while DOWN Participation has contracted sharply.

While my annotations point out upside climaxes, there is a classic downside initiation climax on the second trading day of January. It is followed by two weeks of consolidation, then the down leg is completed with an exhaustion climax on January 24. The final selling climax for the four-month down trend doesn't occur until April 17.

Climactic indicator readings identify points at which the market is overbought or oversold, but they don't always mean that the trend is about to change directions. Currently, the market needs to correct its overbought condition, but it does not appear to be vulnerable to a reversal of trend.

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

The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.

-- posted by Normxxx

Top 336. May 21, 2005 11:15 AM

» Kirk - Re: INITIATION CLIMAX?

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In response to INITIATION CLIMAX? posted by Normxxx:

Nice indicator!

Currently, the market needs to correct its overbought condition, but it does not appear to be vulnerable to a reversal of trend.

My guess is the market will do some of what I did recently. I took a bit of profits in a stock that was up some 160% YTD (a highly speculative one) and used the money to buy two others that were down considerably YTD (one was down 50%). All three stocks are also in my newsletter where, as a whole, they have averaged out to match the benchmark. While I did this with my own money in my personal account for some of my speculative stocks, I would expect the market as a whole to do some "rotation" by taking profits from what is up then rotate the dollars into what has lagged. This is why I believe we've seen energy stocks go down while technology stocks and large cap growth stocks have gone up. The rotation from Energy/Safe to growth/Speculative is often seen as the mark of "the next leg up."

Mileage may vary of course!

-- posted by Kirk

Top 337. May 26, 2005 7:30 AM

» Kirk - Dare We Believe in a Chip Rally?

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Dare We Believe in a Chip Rally?
By Jon D. Markman
RealMoney.com Contributor
5/26/2005 7:07 AM EDT
URL: http://www.thestreet.com/funds/supermode...

Editor's Note: Jon D. Markman writes a weekly column for CNBC on MSN Money that is republished here on TheStreet.com. He's also a regular contributor to RealMoney, TheStreet.com's subscription site. If you'd like to see all of Jon Markman's RealMoney commentary, click here for information about a free trial.

An electrifying change has taken hold in the market over the past couple of weeks that goes well beyond the simple sense that stocks are behaving better. For the first time in more than 18 months, shares of the nation's major utilities have definitively weakened, while the shares of the nation's major technology companies have gathered strength.

The switch in market leadership from companies that are bought for dependable cash flows to companies that represent a speculative bet on the future says a lot about the potential for the strength of the recent rally. It says that investors are finally emerging from their defensive, woe-is-me stance toward equities and are instead staking their money on the potential for better times ahead.

This undercurrent of optimism is most clearly evident in the ratio between the Dow Jones Utility Index, which tracks the nation's 15 largest electricity and natural gas distribution companies, and the Philadelphia Semiconductor Sector Index, or SOX.

The ratio between the utility and semiconductor indices -- now trading at 364.89 and 425.23, respectively -- is currently at 0.86. To produce a more definitive signal of a growing taste for risk, the ratio would have to drop below 0.81. To do that, the utility index would need to sink to around 350, while the SOX would need to trade around 435 -- both of which would be real trend-changing levels.

These kinds of shifts don't occur very often, and they are typically persistent. The last time this change took place, it lasted six months -- from July 2003 to January 2004. Over that span, innovative chipmaker Broadcom (BRCM:Nasdaq) rose 60%, while chip-equipment maker Teradyne (TER:NYSE) rose 55%. Before that, the change in the mood for risk aversion persisted much longer -- from August 1998 to March 2000. In that heyday for technology stocks, industry mainstays like Intel (INTC:Nasdaq) rose more than 500% in value.

A chip rally would be most welcome for the overall market, since success in these stocks tends to lead directly to success for the rest of the companies that trade on the Nasdaq -- and the Nasdaq, in turn, tends to lead the rest of the market. Dare we contemplate the possibility? Let's listen in on four experts' opinions.
Bullish ... With a Catch
Putting in a vote for continued strength for semis and the rest of their volatile crew is this column's favorite market-timer, Paul Desmond of Lowry's Reports. Longtime readers will recall that Desmond uses proprietary measures of investor buying pressure and selling pressure to size up the strength and potential longevity of important intermediate-term market moves.

Back on April 20, which turned out to be the actual bottom of the market so far this year, he said for my column, "Why Market Skeptics See a Huge Opportunity," that the Dow Jones industrials' scary dip below 10,000 that week would be seen in coming months as a great buying opportunity.

Indeed, the Dow has rallied 5% since then, while Intel has jumped 17%. Rather than rest on his chipper laurels, Desmond is now even more bullish, observing that all the evidence in his database encompassing 70 years of market data suggests that the stage is now set for the final leg of the cyclical bull market that began in October 2002. In a note to clients last week, he said probabilities now favor a rally lasting five months from the April low that will result in a 22% gain in the Dow Jones Industrials. That would take the Dow to 12,173 by September -- about 4% higher than its all-time peak of 11,658 in December 1999.

As you might expect, this outrageously sanguine view comes with a catch: Late-stage rallies are not broad-based, as investor appetites increasingly narrow to a select few successful sectors. As the move higher in the major indices progresses, profit-taking in stocks left in the cold increases -- and investors should cull them out, rather than adding to them in anticipation of later participation. By the end of the move higher, Desmond forecasts, buying pressure should begin to measurably dry up and stocks will plateau. That will be a warning to shift back to defensive positions, he says, though at the time, many will be anticipating that it would be just a pause in a larger advance.
The Shadow of Inflation
Ned Davis, whose quantified views on market timing (and the economy) are equally valued by the institutional community, is also on the recovery bandwagon -- though his catch is more immediate. He believes that the threat of inflation poses the greatest risk to the advance of the Nasdaq, as his studies show that when the year-to-year change in the producer price index is greater than 3.3%, the tech-heavy index suffers disproportionately. At 4.8%, the PPI has exerted a negative effect on the Nasdaq so far this year.

While the Nasdaq's relative strength in recent weeks has triggered a "buy" signal for the Nasdaq in his models, he says, in a note to clients on Monday morning, he has yet to see confirmation of the signal from the index's advance/decline line and relative volume measures, while the rising spread between the Moody Baa bond yield and the 10-year Treasury bond yield is definitively negative for the index. Furthermore, he notes that when a cyclical bull market is in its final third, the Dow Jones Industrials tend to outperform the Nasdaq by more than 3.3%.

So while Davis sees the potential for continued Nasdaq strength, he would tend to side with the Dow Jones Industrials over the summer, if a definitive rally ensues.
Too Little Fear
Bank of America's researchers were out with a note on Monday in concurrence with that view, stating that overcapacity and decelerating demand for hardware and software are real problems, and valuations are actually higher in many cases than before the Nasdaq's tear higher in the late 1990s. Moreover, Bank of America's analysts are worried about the lack of fear among technology investors, as the Nasdaq Volatility Index, or VXN, which measures volatility for Nasdaq 100 options, hit an all-time low on Friday.

Analysts at the Canadian-based brokerage CIBC, meanwhile, added their own log to the fire on Monday, downgrading the chip sector to market weight from overweight, as they see an "uneven bottom" for the fundamentals of the group through a "long, slow summer" -- and suggesting that the Street will end up shaving down second- and third-quarter estimates for the group. A full-fledged recovery for the group, they said, is a fourth-quarter event.

If we are to put all of these views into one package, we can see the potential for a decent boost in the Dow Jones Industrials over the next three or four months that is not complemented by a somewhat softer advance in the Nasdaq generally and tech stocks specifically. To take advantage, with stocks that are neither mega-caps nor small-caps, here are 15 companies in the S&P 500 that have the best relative strength in the past three, six and 12 months, are rated 9 or 10 by StockScouter and have market caps between $1 billion and $20 billion. I will track them over the next six months and report back.

See This for a table of the stocks he is tracking.

-- posted by Kirk

Top 338. May 26, 2005 12:39 PM

» Normxxx - QQQQ Crosscurrents

Samex Capital's Stock Market Crosscurrents

By Alan M. Newman, Editor | 26 May 2005

This excerpt from the May 23rd issue has been posted
to coincide with receipt by snail-mail subscribers.

QQQQ

We last covered insider activity in the top ten Nasdaq issues back on September 7, 2004. At that time, we concluded that insiders were revulsed by their own stock, since there were 18 sellers for every buyer. We also concluded these companies were collectively and massively overvalued. What has changed in the last eight months? Insiders have become far more active as sellers, indicating revulsion on one of the largest scales we have ever tracked. The seller-buyer ratio has ballooned to 31.6 to 1 and the absolute number of 284 sellers is the most we have ever recorded.

Just for kicks, we'll tell you that the ratio of shares sold to shares purchased was better than usual at 375 to 1 but let us not leave out that 90% of shares purchased were at one company; Microsoft. Sans "Softee" in the calculation, the ratio soars to 1816 to 1. The average P/E multiple for the group has fallen nicely to 29.3, under the 30 mark for the first time in recent memory, but still extremely high for a group whose best earnings and revenue growth rates are probably in the past. Total market capitalization now stands at $921 billion, up 7% from last September and is equal to exactly one-sixteenth of the entire U.S. stock market. The average price-to-sales ratio of 5.6 is enormous, compared to the other 15/16ths of the U.S. market.

Despite the obvious overvaluation, the group is still quite popular due to their inclusion in the QQQQ Trust, probably the most heavily traded equity entity of all time. The group comprises 39.2% of the trust, which trades an average of nearly 100 million shares per day, roughly $3.5 billion worth. While it may be that sellers are simply taking their proceeds and buying shares in the other nine constituents, we doubt it. The evidence is quite compelling.

Insider activity says these shares are grossly overvalued.

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 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