11-28-01

Charts: We have warned that the markets were getting increasingly vulnerable. However, as long as the up-trend remains intact, people should not jump on the bearish wagon. As of today's close, the markets held up above support, the likelihood is that they will break down, but until it happens, do not write the market's obituary. (If you notice we are only 20% short) Be patient!11-27-01

11-27-01

Charts:  Yesterday we said: 

"The markets continued to gain ground, with negative divergences in the background. The markets can continue higher. Negative divergences -just like positive divergences- can go for some time before the markets finally catch up. However, as long as these divergences are building up, the market is vulnerable to a short but sharp pull-back. Does it have to happen? Of course not! But the probability is increasing by the day. If people can live with the increasing risk, then they may consider being long. For us, the risk -on the down side- exceeds  our parameters. (SEE Volatility Indexes in part 8)

Today we would like to add the following: Every forecast, every comment, every analysis we have made over the past three is posted on our site, for everyone to see. For the most part we have been rather correct. We had a target for NASDAQ in 2000 of 5250 (-/+ 3%) and a target of 1400 before the end of 2001, we warned back in April, that the biggest threat to the market would come from developments in the Middle East (just to highlight some of our calls)  Obviously, we are not perfect, but our record demonstrates that we have a rather good understanding and knowledge of markets, economics and geopolitics. Based upon that knowledge and understanding, we have these to say:

a) If a market acts the way NASDAQ did today, we want to be in cash at least for a couple of days! 

b) At some point the U.S will attack Iraq. We have no comment on whether this should, or, should not happen (probably we should rid the world of Saddam Hussein!) . Our comment is directed ONLY at the economic ramifications and their impact on the equity markets. Do not think that a further military engagement in the Middle East will be  good for the market and the economy. If such event took place, the market will suffer mightly.

SPDRs/Sectors:   Watch out for gold.

11-26-01

Charts:  Today the price charts, showed little change, however, the indicator charts, all are showing credible signs of  "tops" The logical conclusion, is that next week we should see an acceleration in price erosion. If the up-trend is broken, then any decline could last up to 5-8 trading days.

SPDRs/Sectors:   Yesterday and today, we saw money moving into hospitals. Thru-out the past 18 months, we have seen money moving into "defensive" issues -such as health care-  right before every top in technology issues. The trend if continues, could be giving another important signal, that the rally in tech, is coming to an end.

11-19-01

Charts:  The market continued to show "strength" despite being as overbought as ever, in the past ten years. At the same time, almost 80% of the indicators that we use to gauge the internal condition of the market, have diverged negatively.  The only other time, that similar divergences developed and the markets moved higher, it was in November of 1999, which lead to NASDAQ's 100% advance in 4 months, and its subsequent demise. Can it happen again?  Yes! The bubble that burst in March of 2000, was created due to a) excessive liquidity by the FED, and b) unrealistic expectations over corporate earnings. At the moment, we are having -again- excessive liquidity by the FED, and b) unrealistic expectations over corporate profits - the exact same ingredients!   Consequently, it wouldn't be surprising to have the same outcome: another bubble by the end of the first quarter of 2002! We believe, that for the time being -given how overbought the market is- investors should be patient. If another bubble is in the making, there is plenty of time to get in! (nothing wrong making some profits on the long side) Wait, until there is a pull-back. The pull-back will tell us if the rally is over, or, if it has further to go.

On another note, we would like you to take a good look at the following two charts (courtesy of our good friend Stan Ehrlich) The chart on the right is the ten year bond, the chart on the left is the thirty year bond. If you recall, three weeks ago the Treasury Dept., eliminated the 30 year bond, causing an artificial rally, and temporarily pushed yields down. The "talking heads" immediately seized on the opportunity to declare that "lower rates will put another 100b in the hands of the consumers, due to lower mortgage rates, and the economy will take off!" The stock market seized on the bullish news and embarked on another advance that has lasted, so far, three weeks. 

Since then, bond prices have collapsed! Bond yields are now higher, than they were three weeks ago! Thus, all that 100b in the consumers' hands, due to lower mortgage rates, is not going to happen. Now the "talking heads" are saying that higher yields, mean a "better economy ahead" and that is a good reason for the equity markets to rally. Well, we can't have it both ways, can't we? Either interest rates go lower, which is good for the economy, and the stock market, or, they go up and that is not good for the economy and the stock market!. The point we are trying to make is this: many of the reasons that are being offered to justify higher stock prices, are plain bogus, much like the reasons that were being offered between November of 1999 and March of 2000 (did you forget the reasons that were being offered two years ago to justify  P/E ratios of 500+) 

Bottom line: we are seeing lot's of similarities between now and November of 1999. Also we must note, that we are seeing lot's of technical similarities with September 2000. November of 1999 marked the start of a tremendous advance, while September of 2000, marked the start of a horrific 4 month decline. Right now the market is at "crossroads." Be patient, wait, until there is a pull-back. The pull-back will tell us if the rally is over, or, if it has further to go.

SPDRs/Sectors:   The Oil sector (XLE) continues to lose ground, we believe the SPDR should be shorted in any rebound.

11-15-01

Charts:  Today was the third day, of very little movement. The market may be "coiling" in preparation of a blow-off around 3%-3.5% achieving the targets our model is forecasting, or, it may be just "killing time" until options expiration is over for the 10% decline our model is also forecasting. We want to re-iterate that we  believe the decline should be bought, but we do not believe the market should be chased at these levels. 

SPDRs/Sectors:   Over the past three weeks, the Oil Sector has been drifting lower culminating in today's decline of 10% (Wow!) Unfortunately, it is not over. We believe that the sector is headed lower, towards the 1999 and 1998 lows.

11-14-01

Charts: Today, the markets were not able to hold on to their early gains, which is a sign of their vulnerability on the short-term.  Keep in mind that markets are most vulnerable when ALL the news is great! At the moment, we are winning the war, consumer spending is holding  up, oil prices are falling,  some companies are even reporting earnings in line with expectations and so on. Well, the markets have already advanced  substantially in anticipation of all these "good things." Thus it is logical to expect some retreat now that the anticipated good news are actually materializing. Moreover, -until proven otherwise- there is a conviction that the economy has indeed bottomed. We will not know the answer for several weeks, so, investors are free to  err on the positive side! The most accurate gauge of future economic activity is ECRI's Weekly Leading Indicators Index. The Index is a part of intermediate and long-term models.

At the moment only  two observations can be made:

1. Economic activity has fallen off a cliff. We have had some minor attempts to stabilize, but ultimately they all have failed. Given the size and duration of the erosion, it is not very likely that  a "V" shape type of recovery is in the works.

2. Over the past two-three weeks, we have had an up-tick in activity. That's encouraging, but it takes more than 2-3 weeks of an up-tick to conclude that indeed the economic slide has been reversed. We had a similar action in 4 different occasions, in the past 1 months, and then things got worse. So, yes things look better, but we will not know for certain for another 4-6 weeks. In the mean time, market participants will continue to bet on a recovery, pushing the market higher. That is why we believe, the market is vulnerable over the next few days, because it highly overbought, but it should hold up for another 6-8 weeks, until the verdict is in with regards to the economy.  

SPDRs/Sectors:   No comment today, due to the fact that the sector percentage gains/losses were not available.

11-12-01

Charts:  Three comments  for today:

A) The market's action today should open people's eyes, with regards to the actual risk that currently exists in the markets. For weeks, the "talking heads" on TV have been pounding the table that the "market has discounted all the negatives  news and then some" If that was true, then why did  the market immediately sell off this morning after the news, that  a plane had gone down in Queens? The truth is, the market has not discounted anything!, it is floating on thin air and lot's of hope. God forbid  if we actually get some real bad news,  you will see it dropping like a hot potato.

B) Virtually every indicator we follow, has experienced consecutive "minor" changes. In our observation, "minor" in the indicators precede "major" changes in the markets! Three out of four times, the directional  change in the market, matches the directional minor change of the indicators. The minor changes have all been on the downside, as very clearly demonstrated in aggregate by the quantifiers. Therefore, the logical expectation should be  that the next 7%-10% move will be on the downside as well. 

C) Today we spoke with several colleagues of ours, who are running aggressive hedge funds, and who have been shorting the market over the past two weeks. Every single one of them - as they were closing their short positions -confided to us that they "were done with shorting" and they would wait for correction to "buy long." We find their comments rather interesting. Usually the market tops, soon after people stop trying to pick a top, and short sellers capitulate and give up. Our friends gave up today!

11-8-01

Charts:  Yesterday we said: 

"Clearly, the charts and the indicators show that the markets are at the  point where the rally from the April lows run out of steam, rolled over and died. It remains to be seen if this rally will share the same fate. Tomorrow the ECB is expected to cut rates as well. Maybe the markets will use the occasion for the excuse they need to either break out, or begin a break-down. "

Obviously, today's reversal could signal the end of the rally. However, over the past few weeks, the bears have scored victories that only lasted one day. Thus, unless they manage to bring the indexes below their support, the bulls -at least theoretically- they are still in control. Do not get too bearish until the quantifiers turn negative, and the indexes break support.

(The following comments are from yesterday, for those who missed them)

 As we are getting to the "turning point" we would like to make a few comments that we hope will help you to better utilize the information we give you. Professional investors make decisions based upon "risk/reward" parameters. Our system is an "open-end" system. It means that it can be customized to fit different risk/reward parameters. Three weeks ago (see market timing, and October newsletter) we posted the bullish, and, bearish scenarios forecasted by our model. The markets decided to follow the bullish scenario. Our model predicted  with remarkable accuracy, both the target and the pattern the markets followed. Also it indicated the probabilities of the predictions coming to fruition, 40.38% for the NASDAQ scenario, and 39.27% for the SP500 scenario. We doubt that you can find another service available to individual  investors that can supply you with this kind of professional research.  However, there is still one thing left!   You need to define your own risk/reward criteria by which you make decisions, and those criteria must be selected carefully and in accordance to your own tolerance and objectives. For example: Is a 40.83% probability sufficient enough for you to go long? or, is it not? If it is, you should have been long, and if it is not you should have not!  For some investors 30% may be enough, for others 60%, or, 70% or even 90% may be the right number. Professional investors make decisions based upon risk/reward parameters. Set your parameters and then make decisions accordingly.  Our model will probably give another signal pretty soon, it does not matter what it will project, what it matters is the probability of the prediction, is it high enough for you to act or, not? We do not know what is appropriate for you, we do not know your risk tolerance and your reward objectives, we only know ours! We will share with you top notch information and research, it is our hope that you spend some time to learn how to  use  it , to your benefit,  based upon your own "custom" made  criteria.

SPDRs/Sectors:   The Internet sector continues to be the best performing sector for the week. If the market is truly that "strong" how can it be possible, that the best performing sector, is also the most speculative, and it is comprised of stocks with the weakest balance sheets, and cash positions?

11-7-01

Charts:  Clearly, the charts and the indicators show that the markets are at the  point where the rally from the April lows run out of steam, rolled over and died. It remains to be seen if this rally will share the same fate. Tomorrow the ECB is expected to cut rates as well. Maybe the markets will use the occasion for the excuse they need to either break out, or begin a break-down. 

SPDRs/Sectors:   The Internet sector continues to be the best performing sector. If the market is truly that "strong" how can it be possible, that the best performing sector, is also the most speculative, and it is comprised of stocks with the weakest balance sheets, and cash positions?

11-6-01

Yesterday we said:

"In the middle of last week, we said that we were expecting a more decisive move to take place no later than Tuesday of this week. Whether today's rally was the beginning of a more decisive move, or another whipsaw, it has yet to be seen. The markets simply moved back up towards the upper end of their recent range. Will they break thru, or, will they be turned down again? The odds continue to be even. "

With both quantifiers above 20, the odds are now shifting towards the bullish case, and supportive of higher prices. The SP500 is in a zone in which further advances will trigger  computerized "buy" programs, pushing it to 1150-1200. 

One thing to keep in mind is that the market has shown a tendency -over the past 12 months- to reverse course after a couple of days each time the FED has lowered rates.

SPDRs/Sectors:   Tech continues to dominate as it becomes clear that the stimulus package will have several provisions designed to jump start capital spending in technology.

11-5-01

Charts:  Yesterday we said: 

"Today we had a bounce, which we predicted in the "Before The Bell" report this morning, based upon the positive divergences that had developed on an intra-day basis.  However, as soon as, those divergences ceased, the rally died off. It is not unusual for a market to move up,  pull back within the same day, and then try again the next  day. So, we really do not want to read too much into today's action, we view it neither positive, nor negative. We view it for what it really was: ambiguous.  However, we do want to stress that we believe the market will cease its ambiguity within the next 1-3 trading days, and it will begin to move in a more decisive way.

Whether today's rally was the beginning of a more decisive move, or another whipsaw, it has yet to be seen. One thing is certain: fro the past 22 trading days we have had no net gain, or, loss in both  the DJIA and the SP500, while we have had a marginal gain in NASDAQ. This type of action means only one of two things:

1) the market has been consolidating sideways, and it will soon move up and out of its recent trading range, or

2) the market has been building a top, and it will soon break down.

There is no reason trying to guess which one of the two is going to happen. Wait until the market shows its hand. It's better to miss the first few points of the move, and get it right, than trying to get all the points and get it wrong!

SPDRs/Sectors:   Tech continues to dominate as it becomes clear that the stimulus package will have several provisions designed to jump start capital spending in technology.