D.B. Hi Ike, how are you doing?

I.I. Very well, thank you.

D.B. In concluding our last interview on 2-22-03 you said:

 "...We have no evidence to conclude upon that the fundamentals support a sustainable multi month advance.  However, we also know that at times there is a disconnect between fundamentals and technicals which result in the two going in opposite direction for the short term. Such case may be the current one."

Is the rally of the last 8 trading days, a further reminder of the disconnection between the technicals and the fundamentals, and how far can we expect it to go?

I.I. All of our technical indicators -which I will discuss in full detail in the second part of our interview- have turned positive, and that is why in our daily reports for 3-13-03 I said "...Without any doubt, today's action was very positive, and given that the markets have been declining for three months, one ought to be open minded about a rally that may last more than just a couple of days. However, one also needs to be cognizant of the several one day wonder rallies that we have had during this bear market  If tomorrow we have continuation and another break above the next resistance levels, traders should continue to add to long positions -and also increase the size of the positions..."   

Unfortunately, as the technicals have gotten more positive, the fundamentals have gotten more negative, which renders the market as a "buy" for  short term, and as "sell" for the intermediate term! The chart below is our "Master Indicator" chart. It is a monthly chart of the SP, the Technical Quantifier, and the Fundamental Quantifier. Philosophically, I have always believed that when it comes to analyzing the markets, both technicals and fundamentals must be taken into consideration. I believe those who stubbornly embrace only one side of the equation, while dismissing the other, will be occasionally right in their conclusions but only by accident, while those who take in consideration both, will be correct in their analysis, most of the time, not by accident, but by design.

Notice that in three previous occasions, July of 2000, May of 2001, and March of 2002, price and the technicals turned up, while the fundamentals  took a turn for the worse. In all three cases, the fundamental side of the equation turned out to be correct, and price along with the technicals ultimately turned down. Again we are facing the same situation. Price and the technicals improved dramatically, while the fundamentals have deteriorated dramatically. Is this time going to be different, is this "the time"  that price/technicals are finally right, and the market has turned up ahead of the fundamentals? I do not know, it is way too early to tell, my suspicion is that the market once again will prove to be infinitely foolish, instead of infinitely wise, but if the fundamentals begin to improve as well, then I would have to change my intermediate and long term position. 

One of the most accurate indicators -I know off- with regards to predicting future economic activity is the ECRI LEI, take a good look at it. (source: www.economy.com/dismal) 

D.B. You have discussed before the elements that make up the technical component, can you elaborate on the elements that make up the fundamental  component of the Master Indicator?

I.I. Personal/Business Bankruptcies, The Chicago PMI, Consumer Confidence, Chain Store sales, Current Account deficit/surplus, Trade deficit/surplus, Federal Budget deficit/surplus, ECRI WLI, Factory orders, Help Wanted Index, Mass layoffs, Mortgage applications,  Semis book-to-bill, PPI, ISM monthly ROC. 

D.B. What makes you so suspicious of the market's forecast -by its price action- that the economy will improve?

I.I. The "conventional wisdom" is that the economy has slowed down because of uncertainty over Iraq. Certainly the Iraq situation has been a contributing factor, but it is not the cause of the problem. The majority of our clients with managed accounts are  Greek shipping companies, Greece has the biggest commercial fleet in the world. Every single one of our clients, has told us that global economic activity has come to a complete halt. These people know better, because they move goods from one country to another, thus,  they are at the epicenter of global economic activity. Unlike the Norwegians, the Dutch and the Danish, Greek -and also Korean- shipping companies do not lock all of their ships into long term contracts, they prefer "free lancing." They try to have just enough long-term contracts  to cover the company's overhead, and they keep the remaining of the fleet free to be leased by the highest bidder. Such practice allows them to capitalize immediately during times of increased economic activity which results in increased demand for their ships. Over the past 4 months, the only eager bidder has been the U.S. government because of its need to transport equipment to the Gulf. It is highly unlikely that such a large scale economic slow down is due to the war with Iraq.  I believe the problem lies with continuing overcapacity and simultaneous lack of pick up in demand. 

D.B. What is it the most positive, and the most negative development according to your observations?

I.I. The most positive development is this: In the previous three incidents that the technicals improved, while the fundamentals deteriorated, the improvement was concentrated on price based indicators only. This time around, the improvement is both in price based indicators, and in volume based indicators. Volume declined thru-out the entire three months of the decline between the December 2nd top, and the March 12th low. Selling pressure -in contrast to the previous three times- declined as price fell. Technically that is important and positive. 

On the other hand, the most negative development, is that the recent advance was fueled by the positive news in the war front. War is an unpredictable beast, what happens if -God forbid- we get some negative news? Is the market going to turn around and decline 10%? I do not know, and I don't believe anyone else does, either! That is why I want to see "fundamental substance" behind a technical advance, in order to conclude that the  move can last for the intermediate term, opposed to just a few days. People seem to have forgotten that exactly a year ago the SP rallied -in 12 trading days- from 1074 on 2-22, to 1173 on 3-11, and then it rolled over and never looked back!

D.B. What can we expect for now?

I.I. We'll take a look at a couple of indicators to answer your question for now, and I'll elaborate in detail when we go over all of our indicators. The 10 and 20 day TIs have turned up, which means the trend is up, however, the Thrust Oscillators are topping, which means the initial thrust of the up-move has been exhausted, thus, we should see a pullback, and then another push higher.

Based upon our indicators, I believe that short-term traders should be buying any pullback that holds at support, while intermediate term investors should not commit funds  until the market ceases to be news driven only. 

D.B. If the rally continues on, how far can do you think it can go?

I.I. If the market has finally managed to predict an up-turn in the fundamentals, then we can have a cyclical bull move that can last 12-18 months, I have serious doubts about that, but my job is to make decisions based upon the data at hand, if the data at hand suggests that such change has taken place, I would have to put my doubts aside. On the other hand, if we have another one of those bear market rallies based on hope, it could run for another 4-8 weeks, but by June it will become all too clear that the "second half recovery" will again fail to show up. Of course, there is always the possibility that the rally has run its course already!

D.B. Short-term you are obviously positive on the market, what will change your mind?

I.I. I would get rather bearish if the SP goes sideways in the next two weeks moving in a tight 20-30 point range, while bullish sentiment moves up near the top of its range. 

Now let's move on to part B, so we talk about the rest of our technical indicators.