I will be watching the close on the NYSE today. If it can close above 9600 it will have completed a trend reversal according to Victor Sperandeos 1-2-3 reversal rules. If so the test of the lows at #2 was very weak. If that's all the test we're going to get out of this correction then this is one very powerful bull market IMO. We'll have to see how the market closes.
Money is again rapidly flowing into the 3 month T-bill. As we can see in the past this has been followed by a cycle of Fed rate cuts. The last week this strong flow of money into T-bills was a sign of fear as investors wanted out of riskier assets and into safety. The last 2 days so far the market has been strong so I'm of the opinion that the market is seeing a rate cutting cycle ahead. Apparently the market thinks this will be a positive for the economy and stocks. Well either that or the credit markets are bracing for another round of selling and the stock market doesn't know what it's doing.
OK here's my pitiful attempt at a pattern analysis. It looks like we may be forming an inverse head & shoulders pattern. LOL Actually what I'm looking at is a potential 1-2-3 reversal with the big key reversal day and a very weak test of the lows. If the S&P can close above the reaction high then it will have completed the trend change back to the long side. Does this guarantee the market is going back up? Of course not there are no guarantees in the stock market but it does skew the odds a little more in favor of the bulls. Also yesterdays 90+% down volume day was the worst in 10 years. The last four times we saw anything similar in the last decade it has been followed by an average weekly gain of 4.9% and a monthly gain of 6.2%. 4 out of 4, that's pretty good odds. Combine that with the COT at historic long positions, insiders backing up the truck and short interest at record levels and those are the kind of odds I refuse to pass up.
I'm going to point out just how unusual the breadth extremes were the week before last. The only time in the last 10 years that have seen new lows on the NYSE spike higher was the bottom of the 98 decline. On Thursday Aug. 16th the new lows hit 1132. There are 3453 stocks traded on the NYSE. That means 1/3 of all stocks on the NYSE hit new lows on Aug. 16th. That is a sign of extreme panic. I think we've all learned by now that panic is almost always an opportunity. We all know that the market reversed big time on that day and then rallied big the next day. As a matter of fact the next day was a 90% up volume day. Most intermediate rallies start with a 90% day. I strongly believe we saw the internal low for the decline on Aug. 16th. As of today the new lows have totally collapsed back down to 16. We may very well see the market drop again and new lows may move even higher than 1132 but let's just say I have strong doubts as to that happening. If the market holds here then we should have hit such an oversold level that the ensuing rally could be quite impressive and that's exactly what the historical precedents would suggest.
I've had a few requests to do a post on how I use TA. Here goes. First off let me say to a great extent I look for TA that will confirm the COT position. So yes I have a bias. Don't we all? Mostly I'm looking for reversals that signify that the selling or buying has dried up. I have a strong preference for the 2b reversal. I also look for the 4 day rule and 4 day corollary after long intermediate moves. Mostly I'm looking for levels of supply and demand. I will use indicators such as RSI, MACD and Stochastics as a secondary indicator if they confirm the COT position but definitely not as a reason to trade against the big boys. I almost never pay any attention to patterns personally such as head and shoulders or bear flags (whatever the hell that is). I particularly like the point and figure charts because they take out everything but the price action and levels of support and resistance are pretty obvious. I try to keep it as simple as possible and not overthink my trades. If the COT is long I look at the indicators to confirm that position. If it's short I look for indicators that would suggest that the market is or has turned down. Pretty basic stuff really.
The Summation index has now turned back up. There have only been a few times where this index has gotten more oversold in the last 10 years. One was 98. While there could be another drop the odds are against it and if it does happen the data would suggest it won't drop significantly below last Thursday before a rally ensues. As I've mentioned before these declines that come at the very end of a long multi year rallies tend to be very swift and very scary. Does anyone think that's an accurate description of what we just went through? These kind of corrections historically recover very quickly. The declines that do the real damage are the ones that start early in the cycle and just slowly hemorrhage for months or years. Remember 2000-2003 or for some of the older investors 1973-74. I have a feeling the next cycle is going to be one of those nasty ones.
I like to keep tabs on the Bullish Percentage charts. I know many of you are familiar with my 5th year scenario. All that amounts to is that normally bull markets can't make it passed a fifth year without a large decline. One of the things I was going to be looking for to indicate that the fifth year decline was playing out was an oversold reading on the Bullish percentage chart. Something in the 30 or lower range. Well the NYSE so far has bottomed at 30.99 and has now turned up and is back above 40. All this means is that only 30% of the stocks on the NYSE were in bullish trends on the point and figure charts. That's an incredibly small amount of stocks in bullish trends. If this rises back above 50 it will be just another positive sign for the market. Now notice the second chart of the Nasdaq 100. It was much stronger than the rest of the market and never even came close to oversold. That should not be happening in any serious decline. The Nasdaq should be leading the charge lower. Notice how it lead last year. It is entirely possible that we just got the 5th year decline and the pitiful 10% is all the market is going to give back. This seems hard for me to believe but a great many indicators other than just the BPNYA also signaled extreme oversold levels rarely seen and usually only at very important lows. Of course we still have the fact that the commercials are at historic long positions. Oh and in case anyone hasn't noticed the current long signal is still profitable so far. As a matter of fact everyone just got a second chance to get in at a lower level than the original signal and you still have a chance to get in at a level very close to the original even at today's close. Ah but after experiencing what we just went through will you now be able to pull the trigger? Buffett did. Lambert did. Gates did. Soros did. Altucher did. Ah what the hell do they know anyway.
The Russell appears to be getting coiled for a big move. I have no idea whether that move will be up or down however. There are some positive signs however. Note the 2b reversal and the divergences in MACD and RSI. Also notice the 4 up days in a row. Remember the 4 day rule?
You're looking at 10 years of bull market history. During that 10 years we saw 9 10% corrections or better. 10% corrections don't seem to be all that unusual. For all the panic lately you would think something incredibly out of the ordinary had happened and maybe something extremely rare will happen but as of right now this just looks like the same old thing we've seen happen many times in the past. As a matter of fact at the moment it looks extremely tame when you consider the financial Armageddon rhetoric being thrown about. If 10% is all the market can muster with the credit markets locked up then this has got to be one of the strongest bull markets in history. The last time we had a financial meltdown was 98 and the market managed to drop 22% before common sense came back and the world realized the sky really wasn't falling.
First off let me point out the 4 day corollary signal that was given by the Dow on Friday. For any who are new to the site here is a post with explanations on the 4 day rules. Also take a look at the long tail in both charts. Normally a strong sign of a bottom. On top of that we had a 90% up day the very next day. Many intermediate declines end on a 90% up day.
The Vix is fast approaching levels that have signaled 4 year cycle lows in the past. You can't see it on this long term chart but the VIX has jumped from 22 to 32 in 5 days. At the rate this market is moving it could reach the 40's in one or two days. That should produce the kind of panic that signals major bottoms. That's not to say that we couldn't get a serious drop yet. I'll say it again these kind of waterfall declines are normally corrected rather quickly, similar to 90 & 98. That being said if you can't stand the volatility simply stand aside until things calm down. They will calm down they always do. This isn't the end of the world anymore than any other highly volatile time in the market. What I do know is that emotional selling will always create bargains, always! I'm looking at the PM myself.
I've mentioned this before. You need to watch what the Fed does not what they say. If they were really determined to control inflation they would have continued to raise rates last summer when the had the commodity markets deflating. Instead they buckled to political pressure and quit raising rates. Look at the charts above and you tell me if inflation is under control. Now they have a real problem. They can't raise rates because credit markets are in turmoil. If the pressure from the politicians gets hot enough I suspect they will start cutting. If the economy starts to sour the incumbents can expect to get booted in the next election. I suspect the powers that be are already feeling the temperture rising what with the stock market declines coupled with the heat in the real estate markets. I wouldn't be surprised if sometime in the near future the Fed starts lowering rates.
I'm no master at cycles but even a dumby like myself can sometimes spot the obvious. The four year cycle in the stock market has been around for about the last 100 years or so. I've noted the last five cycle bottoms on the chart. During a multi year secular bull market most of the 4 year cycle tops tend to be extremely right translated. All that means is that the top tends to form very far into the 4 year cycle. Examples 87, 90, 98 and it looks like this 4 year cycle will also be extremely right translated. These cycles tend to be short and vicious but they also tend to be corrected fairly quickly. Ex. 90 & 98. The cycles that do the real damage tend to be the ones that are left translated. Ex. the cycle that topped in 2000. It just bled investors to death for almost 2 1/2 years and has taken 5 years to recover from. The current cycle will most likely be the quick nasty type. These usually result from some kind of scare that seems much worse than it really is thus the market recovers rather quickly when it comes to it's senses. The left translated cycles are normally a sign of a deteriorating business climate. Ex. the spike in energy in 2000 coupled with the fact that the market had to grasp the fact that many dot.coms were never going to make the kind of money it would take to justify the valuations at the time. Then of course 9/11 dealt a serious blow to the economy. What transpired was a slow death of sinking stock valuations followed by sharp counter trend rallies that would inspire just enough hope to keep most investors holding and hoping.
Some current examples of 2b reversals. These are by no means 100%. I've never actually tested to see what kind of % can be expected from a 2b signal. If I had to guess I'd say maybe 55-60%. The Dow actually did signal a 2b on Friday along with the NYSE. Just something to think about if you are trying to press the short side. The odds may be slightly against you. It might not hurt to cover and see if the 2b is negated before pressing the short side anymore.
What we're looking at is the bull bear cycle for the US dollar. Notice the three legs down. Most bear markets have at least three legs down some more. the Nikkei had multiple down legs. However applying this to the present situation we see the initial decline in the dollar lasted about 2 1/2 years. Sound familiar? Then we got the counter trend rally from the beginning to the end of 05. We are now in the process of the 2nd leg down which should take the dollar index to new lows. Actually it already has taken out the 05 lows. I suspect it will continue down much more even though the 2b reversal from last week may mean a bit of a bounce here. When this decline really starts to roll into new lows gold should move much higher to put it mildly. Again if gold can push past the old high of $880 then the average gain has been 140%. Patience is the word of the day for PM holders. Our time will come and probably sooner than later.
Anybody will tell you that you've got to sell housing and financials nowadays. It's common knowledge right. I mean it only makes sense real estate is done and the financials are going to collapse because of subprime and Alt-A loans. Even Cramer can tell you that you've got to get rid of anything in this sector. Well let's take a look at the charts. The S&P is up 4.50% in the last 3 days. Pretty sweet. But wait a minute housing is up over 8%, FNM is up over 17%, the banks and broker dealers are both up over 8%. What the hell is going on? I thought these two sectors were toast. This very well could just be an oversold bounce heaven knows they've both been punished recently. However let me lay out another possibility. The panic selling the last couple of weeks may just have put some very good companies on sale for half price. Sure subprime is a problem but it won't last forever. I dare say most if not all the large banks are going to take some heat but I doubt that any of them have sustained irreparable damage. Perhaps people that don't necessarily follow the herd realized the other day that Mr. Market just threw them a slow ball right over the plate and all they had to do is swing. Maybe those same people also noticed the 10 year yield was back down around 4.75 which is good for the housing sector. Maybe those people also think that even though the housing sector is in trouble I doubt it is finished as an industry. You might also notice that the housing sector has been in decline for 2 years now. Remember how I noted that initial legs down in bear markets usually last about 2- 2 1/2 years. With all the rotten news in the real estate and financial markets these two sectors are moving up strong not sinking. This is how major bottoms are put in when the market can't go down anymore even on bad news. I think these two sectors bear close watching in the coming weeks.
There are several VTO and Bollinger band crash trades that may close soon. The Q bollinger band crash trade signalled at $49.00. Any close above that will signal a profitable exit. The VTO is also still open. Any close above $152 on the SPY Bollinger band trade will signal a profitable exit. VTO trade is also still open here. The third chart is the weekly Bollinger band crash on the SPY. If the close on Friday is above the open last Monday we will also have a profitable trade here. The weekly VTO is also still open. Last week I imagine many investors probably exited these trades thus guaranteeing a loss. Now do you see why discipline is so important. If you are going to take these trades then you MUST be willing to take a loss otherwise you won't hold on for the winning trades. If you don't follow the rules of the trade you turn a positive expectancy into a negative one.
You can see from the first chart how unusual the the breadth extreme was during the recent decline. In the past these kind of extreme spikes have signaled the exact bottoms. The only exception was the 04 period. However there was a strong rally after the 04 spike down. Now look at the second chart. This signal was slightly different than other spikes in that the market moved down into a lower low but the NYHL diverged and made a higher low. The odds seem to suggest that we've probably made the low or at the very least we should bounce strongly before the market can work lower again.
The current long position in the COT is historically the largest ever. Looking back the only two times that the COT reached bullish levels similar were in 94 and Oct. of 99. As you can see the outcome was fairly positive on both occasions and that's a bit of an understatement.
Yep you read it right! A guaranteed 30% return if you were to buy GS right here. How can that be you ask it looks like its in free fall. Notice I didn't say a guaranteed 30% return in the next month or even in the next year. But if an investor is willing to buy and hold GS and willing to believe they will survive the current turmoil in the credit markets without going bankrupt then I guarantee they will be back to making new highs some time in the future. When that happens you will have earned 30% on your investment. Even if it takes 3 years for them to get back to the highs you would still make 10% a year which is double what you can get in treasuries plus you will get a .70% annual dividend. It is possible you might have to hold through a draw down on your investment but eventually GS IMO will be back to making tons of cash and the market will see that whenever this current crisis passes and it will pass, they all do eventually. Panic like what we are seeing now creates opportunities. If you can keep your head and think rationally you can find great companies that are being put on sale for no other reason than human emotions are running amok. This is how investors like Buffet, Soros and Greenblatt think. Is it any wonder they are billionaires.
I thought I'd post a few gold and silver stocks here and in the previous post that I think may be leaders if the PM market is ready to embark on another leg up. Most of these are in long term uptrends, the 200 DMA is ascending strongly and the 50 DMA is above the 200.
Posts
All Comments
