D.B. Hi Ike, how are you doing?

I.I. Fine, thank you.

D.B. The market has been in a narrow trading range the past two weeks, leaving both the bulls and the bears without much to cheer about, any thoughts on the market's recent action?

I.I. The  scientific  and empirical evidence suggests that the market is at a turning point. Allow me to elaborate on the empirical evidence  first. If you listen to some of the interviews that I have done lately, a common theme emerges: most of my guests have been complaining that it has been tough to make money the past 2-3 weeks, and especially last week. It has been my observation over the years, that when experienced traders have difficulty making money, the market is close to a major turning point. Usually,  as the market gets ready to turn, it is characterized by lot's of intra-day volatility, with no significant net difference at the close. At the same time due to a number of cross-currents that are at work at turning points, the market  gives lots of conflicting and often false signals. 

D.B. Is the market going to break on the upside, or, on the downside?

I.I. The scientific evidence points to the downside. In the second part of our interview, I'll go over 20 of  the indicators that we look at, and you'll see that only 4 are positive, the remaining 16 are negative. Therefore, I must conclude that whenever the break comes, more likely it will be on the downside. Moreover, if the July lows were of intermediate term significance, most of the indicators would have remained positive, and this is not the case. In fact,  I elucidated on that last week.

D.B. Is there a chance the market breaks on the upside?

I.I. There is always a chance that for some odd reasons the market will surprise the heck out of you, and do something different than what you're expecting. It is possible, but it is not very probable when 16 out of 20 indicators are pointing down.

D.B. I want to quiz you further on this if you don't mind. Is anything that should keep you awake at night if you are short?

I.I. Yes! Paradoxically, price has not broken down yet in a manner commensurate to the readings we are getting from our indicators, and that is why we are keeping very tight stops. According to the readings we are getting from our indicators,  the SP should be trading below 870, but it is not! On the other hand, it is not too far away from breaking below those levels either, it can do that in just one day.

D.B. The fact that price has held up better than what the indicators suggest, shouldn't that be interpreted as a sign of strength?

I.I. Not necessarily, most of the indicators I am referring to are "leading indicators" therefore, you would expect price to lag. In other words, they turn down, or, up, before price actually does. Once, price moves in the direction the indicators are pointing, then you have full confirmation.

D.B. What are the latest forecasts produced by your models?

I.I. We have been on a "sell" signal for NASDAQ since 9-5-02, and our model has remained "neutral" on the SP since 7-22-02.  

(Originally generated on 9-5-02, see market timing) Our intermediate forecasting model,  has produced two scenarios for the next 2-4 weeks. On the bullish side we have a target of 1415, and a probability of 29.03% to materialize, and on the bearish side we have a target of 1080 and a probability of 67.23% to materialize. NOTICE that the ratio between the bearish and the bullish scenario stands at   2.3:1 (67.23% divided by 29.03%) thus producing a "sell" signal. (The red line represents the most likely price action to take place on the way to reach the target price. The ratio means that it is twice  as   likely -at the present time- for the index to fall to 1080 than it is  to rise to 1415.

Our Market Positions: Dow:BEARISH, SP500:BEARISH NASDAQ:BEARISH

I.I. Never-the-less, the bottom line lies with price, based upon the evidence that I have -which I'll cover extensively in part II- I expect a break down, and I have positioned our accounts accordingly, but until price does break down, I can't say that I am sleeping too comfortably at night. You sign up for "uncomfortable nights" when you take the job!

D.B. What can turn the market around?

I.I. At this point, it would take a number of positive news that would change investors' perception about the future direction of stocks and the economy, and would lead them to buy stocks "en masse" thus, reversing the current negative background. With earnings pre-announcements taking center stage in the next 2-3 weeks, the potential of war with Iraq, and the continuous barrage of economic numbers that indicate a stalling economy, I just can't see where the good news will come from to lift the market. At best, we are looking for a revisit of the August highs. 

D.B. What is your view of the economy?

I.I. I have the same view as I did almost two years ago. Back then I opined that we had witnessed the bursting of a bubble and I wrote "...If this is what is happening with the U.S. economy then investors should expect several quarters in which the economy alternates between sub-par growth and negative growth. " (see January, 2001 newsletter) The economy is still dealing with overcapacity issues, and it will take another 3-4 quarters before the first signs of growth acceleration become evident, assuming a) the consumer doesn't break down between now and then, and b) we don't have an exogenous event that interrupts decisively the economy's slow recovery. I would imagine that if the U.S. does go into full scale war with Iraq, the consumers will  moderate their spending out of uncertainty, oil prices will temporarily pike up, and the U.S. will have to spend billions of dollars to support the operation, meaning higher government deficits. I am not passing judgment on the appropriateness of the action, I am simply saying that such action -although may be necessary- it will not impact the economy favorably, and definitely, it won't do any good for the stock market. Even under the best case scenario, in which nothing happens and the economy begins to accelerate in late 2003, early 2004, we still have to deal with 4-6 quarters of disappointing corporate profits and a tough investing environment, one that favors flexible strategy and  "timing" instead of "buying and holding." 

D.B. Let me get back to the stock market, before we go into the technicals. If the market does break down, then what?

I.I. If the market does break, the  it will be swift sharp and short. Keep in mind that in this entire year, NASDAQ for example has not had a rally that lasted more than 3 weeks! We have yet to have the "bear market wonder rally" for the year. I think if the market experiences a sharp break below the July lows, real panic will set in, and that will set up the stage for a 8-12 week rally, going into the end of the year.

Now let's move on to part B, so we talk about charts and   our indicators.