D.B. Hi Ike, how are doing?

I.I. I am doing well, thank you.

D.B. In our last interview you had mentioned that you were  modestly  positive -two of the three technically only oriented- market timing indicators were on a buy signal, but you were also on alert for a possible significant change in trend in early October. We are in the middle of October -as we speak- so, what is your current view?

I.I. We still have two of them -the Quantifiers, and the 10/20 day TIs- on a buy signal, but the overall technical condition has deteriorated quite a bit, as illustrated by the many sharp divergences between price and every other indicator we look at.

D.B. Does that mean the market is in "imminent danger?"

I.I. Not necessarily, although it could very well be. There is something very important that we need to recognize in weighting the significance of an indicator at any point in time. We need to keep in mind that the market is subject to several different forces. Indicators measure the magnitude of those forces. However, at certain periods, a particular force may have disproportionably increased its influence on the market in comparison to the rest, thus, increasing its "pull" on the market. Therefore, it is important to recognize the  dominant forces behind a particular market move, and give them more weight in our analysis. Unless the forces that are fueling a particular move, stop to do so, logically we can't expect the move to come to an end on its own.

The rally from the March lows has been fueled by two forces; a robust preference for risk, and unprecedented liquidity. Unless, either, or both of these two primary forces subside, we can't expect secondary forces to have a major impact on the market.

D.B. What are your liquidity indicators are telling us right now?

I.I. Let's take a look at the chart!

There are three things we can observe;

a) The gap between inflows and outflows is quite wide, there is still more money coming into the market, than money leaving the market. More investors are of the opinion that it is in their own best interest to be buyers then to be sellers. Well, it's kind of difficult for a market to decline, when people are buying it -unless everyone has bought, and I don't believe we're there yet.

b) There has been a negative divergence between point A and point B, which means although inflows are outpacing outflows, they're doing it at a declining rate, that is genuine warning sign, but it is only a warning and nothing more.

c) Notice that at point C, we had similar divergences, but due to the fact that liquidity never turned negative, the declining rate of inflows resulted only in a minor pullback.

On the other front -risk preference- we can observe that there isn't notable change in that area either. Credit spreads continue to shrink. One may argue that speculative tech companies  having their bonds trading at 90, 95, or even 110 and 115, is insane! I agree, however, until the insanity stops, the trend is up!  Until we see risk premiums beginning to rise, there is no divergence between price action, and investors' preference.

We can observe the same by examining the relative VIX and VXN, which I prefer a lot more than looking at their  absolute levels. (the relative volatility index is  a ratio calculated by dividing the stock index, by the absolute volatility index)

By examining these two charts, we can make two observations;

a) Investors' preference for risk is as robust as ever! It is when the volatility ratios begin to come down that signify a change in investors' preference.

b) Although investors' preference for risk remains robust, it is also at levels, that in the past has NOT rewarded investors for the risk they were taking! Notice that the SPX/VIX ratio is very near its most recent tops at points D, E, and F. More importantly, there have been only three times that the ratio has shot up higher (points A, B, and C) and all three times resulted in declines in excess of 10%. In addition, the ratio is now as far from its 250 day moving average as it was at the top in September of 2000 (notice the distance between points G and G' for the SPX/VIX ratio, and the distance between points F and F' for the NDX/VXN ratio) a time that also did not reward investors for the risk they were taking.

So, it could very well be that irrationally exuberant  risk takers may be disappointed, but  unless investors become convinced that it is in their own best interest to take less risk, than more risk, we're not going to see much happening on the downside.

D.B. So, what is your prognosis?

I.I. Let's take a look at the whole picture, and I'll tell you my overall conclusion at the end.