Market Clues

There was a distinct lack of buying support in the market Thursday and the market took the path of least resistance to the downside. The broad market was again stronger than the blue chips, but both are on downward trajectories. This is consistent with the dip into negative territory on our Volume Oscillators in recent days.

Because the broad market continues to outperform, the underlying trend should remain up and a buying opportunity come our way soon. For now, though, the market is likely to be in a corrective mode as volume dries up in the hot summer sun.

The Fourth of July Holiday is coming Monday in the US and trading should be thin next week. The highlight of this 4th will be the Deep Impact of a NASA spacecraft in comet Tempel 1 very early in the morning. We'll be sending out the Weekend Update early Friday evening and taking advantage of the long weekend.

Additional stock market commentary -- for subscribers only -- can be found here: Subscriber Notes (if you're reading this in plain text format, visit the MyClues Home Page and click on "Subscriber Notes" in the Quick Links section at the top of the page).

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posted by Bob Carver  # 10:59 PM

The broad market continued to rise modestly on Wednesday, but the blue chips drooped. We are of the opinion that the market has entered a trading range here. Option sellers always love to see a rangebound market because that's what makes them money.

Bonds opened near the high of the day and closed near the low, which is definitely a sign of distribution. The Federal Reserve is poised to raise short term rates another ¼-point on Thursday, but now that those rates are over the nominal inflation rate, they are beginning to affect longer term rates. When short term rates were below the inflation rate, it made sense for investors to buy longer term bonds to get a better rate of return. But, now that short term rates are moving up and approaching long term rates, it makes no sense to take the risk of holding long term bonds that pay little more than shorter term -- and less risky -- bonds. Thus, the flight from long term bonds is just beginning to roll down the runway.

If you are afraid that the Fed is about to pitch the economy into a recession, history tells us that is not likely until the real interest rate (the nominal rate minus the inflation rate) has reached about 2½%. Right now, real rates are about half that. The Fed will likely continue raising rates in "baby steps" until signs of a cooling real estate market start to appear. And, of course, this will continue to attract investors to shorter term bonds and away from longer term bonds.

Additional stock market commentary -- for subscribers only -- can be found here: Subscriber Notes (if you're reading this in plain text format, visit the MyClues Home Page and click on "Subscriber Notes" in the Quick Links section at the top of the page).

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posted by Bob Carver  # 11:11 PM

Maybe we're just a bit too suspicous, but the ease with which the market moved up has a false ring to it. It's not that we mind making money, but the OEX speculators just don't make money this easily, normally. On Tuesday they were mostly bullish, not overly so, but they were right (our OEX put/call ratio was showing only 72¢ going into puts for every dollar into calls). The broad market regained more than half of the points lost in last week's geomagnetic storm selloff. But, the gains came accompanied by no confirmation from volume and we're counting this rally as a wave b rally in the context of a correction, with a wave c to come.

Seasonally, this is a good time for a rally, as we've mentioned (and apparently the OEX specs know it, too). The Fourth of July is usually good for bullish investors. But, seasonality doesn't always work and coincident indicators take precedence over seasonals most of the time. Ideally, we'd love to see the market in a quick plunge to the lower Bollinger Bands of the various indices to setup a good buying opportunity.

Additional stock market commentary -- for subscribers only -- can be found here: Subscriber Notes (if you're reading this in plain text format, visit the MyClues Home Page and click on "Subscriber Notes" in the Quick Links section at the top of the page).

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posted by Bob Carver  # 10:50 PM

The stock market decline is losing momentum, but OEX speculators, who are almost always wrong on market direction as a group, are turning bullish as they prefer call options by a slight margin over puts. That's something that warns us that even if we get a bounce starting this week, it could just be a temporary one, with further weakness after it has run its course. QQQQ traders, to their credit, favor puts over call by a 2:1 margin and they tend to be more right than wrong on market direction.

Still, the long term picture looks higher for stocks, despite near term weakness. It will take a bit of fear to ignite a trending rally, though.

This is the last week of the month and you know what that means: Monthly Buying Spree begins on the next-to-last trading day of the month and ends on the third trading day of the next month. This one is especially good because it is also the end of the 2nd quarter of the year and a time when money managers get their portfolio portraits taken. They tend to load up on stocks which have done well. Then, there's Window Dressing, where managers try to inflate their portfolios by buying stocks they already own. Given the seasonal tendencies, those OEX specs may actually turn out to be right, but from a slightly lower level.

Additional stock market commentary -- for subscribers only -- can be found here: Subscriber Notes (if you're reading this in plain text format, visit the MyClues Home Page and click on "Subscriber Notes" in the Quick Links section at the top of the page).

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posted by Bob Carver  # 10:20 PM

It's a never-ended story for journalists: determine which direction the stock market moved, then find a news story and spin a yarn around it which explains why the market moved in that direction. It's amazing anyone ever reads this malarkey anymore.

The headlines on Saturday read, "Wall Street slides on oil for second day in a row." Justifying one's profession never got so fanatical as this. While ignoring the obvious -- that Wall Street had been rallying for weeks as oil prices rose higher -- the poor journalists even went so far as to blame China's bid for Unocal as unnerving the market! Does the average newspaper reader actually believe this stuff?

The real reason the market went down on Thursday and Friday was what we discussed yesterday, so we won't rehash the details. Chalk it up to an extremely overbought market and the final leg down in a correction which has been ongoing for over three weeks and you're going to get the journalists chasing their tails to "explain" why the market moved the way it did.

Volume was extremely heavy on Friday, but there was a very simple and non-sinister reason to explain it: the annual Russell 3000 reconstitution. Every year at this time, the Russell Company adds and subtracts stocks from its popular Russell 1000 and 2000 indices (the sum of those indices is equal to the Russell 3000) to bring them in line with the current market. Mutual funds, including ETFs, which track those two indices are required to buy and sell stocks to bring them into line with the reconstituted indices, which explains the extraordinarily high volume day. That it happened to be a down day was just the bad luck of the draw, although selling in the stocks which were being deleted from the list might have actually helped precipitate the selloff on Thursday as fund managers got a head start on the reconstitution. Interestingly, if you look at the intraday chart patterns over the last week, they were eerily simlar to those leading up to and following the 9/11 event -- on a much smaller scale, obviously.

This is a very welcome correction and should be over fairly quickly now that it's in its 4th week, allowing stocks to soon rally sharply higher. Seasonally, the end of June and beginning of July are a very strong time in the market and we are also in year 5 of the decade, which shows the strongest gains of all years of the decade on average (about 30% in fact). In other words, we are in one of the sweetest spots of the sweetest year!

This weekend we look at a number of hot and not-so-hot markets in our Detailed Comments .

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posted by Bob Carver  # 3:18 AM

This nervous market took a leap off the diving board Thursday, probably due more to Mother Nature than anything anyone said. Taking the market by surprise, a strong geomagnetic storm broke out early Thursday, causing investors some anxiety. And, as you probably know, anxious investors who are sitting on a pile of paper profits are prone to sell. We're sure the journalists won't report this -- they like to keep up the fiction that "news" drives the market (it justifies their careers). But, it's really emotions which drive the market and emotions definitely ruled the market on Thursday. Note that our Trading Page has an indicator at the bottom of the page which shows STORM! when a geomagnetic storm breaks out, which it did on Thursday.

This action is really a pretty bullish development. Why? Our indicators had been telling us in the last few weeks that selling pressure was building up and beginning to outweigh buying pressure. Buyers, who had been very aggressively buying stocks last month, were backing away. We knew that any rally that started now would be very weak -- and one we'd want to use to liquidate some of our bullish holdings. We actually date the start of the correction as the 2nd of June, the day our lead-dog index, the NASDAQ-100 Index, topped. That makes Thursday the end of the 3rd full week of correction. Consequently, we're well along in the correction and probably seeing the final wave down unfold now. All we need to confirm the bottom is to see the buyers coming back into the market and the option speculators getting bearish. Our lead-dogs should show good relative strength if we are approaching a bottom -- and, indeed, both SOX and NDX were stronger than the Dow (in fact, almost any index you look at was stronger than the Dow on Thursday).

Those option specs were getting there on Thursday as our OEX option sentiment numbers showed a definite tilt to the bearish side of things. Specs poured only 63¢ into calls (upside bets) for every dollar of puts; typically, a bottom will be found when only 50¢ of calls are purchased.

Additional stock market commentary -- for subscribers only -- can be found here: Subscriber Notes (if you're reading this in plain text format, visit the MyClues Home Page and click on "Subscriber Notes" in the Quick Links section at the top of the page).

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posted by Bob Carver  # 7:40 PM

The market moved sideways Wednesday as it prepares for a resumption of the uptrend. However, we are coming to an important juncture in the stock market very soon. Additional stock market commentary -- for subscribers only -- can be found here: Subscriber Notes (if you're reading this in plain text format, visit the MyClues Home Page and click on "Subscriber Notes" in the Quick Links section at the top of the page).

Interest rates moved down Wednesday on signs of demand for government paper from buyers. Despite strong signs that inflation will soon be a problem, demand is a key factor in floating bond prices into the stratosphere in a bubble of historic proportions. When the history of the 21st century is written, the bursting of the bond bubble will be a far bigger financial story than the smaller Internet stock bubble. And, the consequences of the deflation of bond prices will be far wider as well. But, for now, the bond bulls can enjoy this retest of the recent highs:

Note that the volume on the rally has been very light. This is confirmed by the weak accumulation-distribution line. Friday is shaping up to be a likely top in the bond market.

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posted by Bob Carver  # 9:29 PM

We often talk about our "lead dogs" -- usually referring to the NASDAQ-100 and Semiconductor Indices. But there are also some foreign markets which tend to make their moves ahead of the US market and one of them is the FTSE-100 at the London Stock Exchange. The London market has a long history of leading the US, in fact: famous speculator Jesse Livermore had an agent stationed in London who wired him the results of trading in London ahead of Wall Street's opening bell back in the 'Twenties. That gave him a few hours head start on the Crash of 1929 in fact. It definitely pays to watch what London is doing.

As Tom O'Brien (www.TFNN.com) mentioned on his Tuesday afternoon radio show, the London market certainly looks poised to move past the key 50% retracement level and possibly rally up to that 62% retracement price in the weekly chart below:

As you can see from the chart, we have drawn a Magic-T (see http://ttheory.typepad.com/terry_laundrys_t_theory_o/, Terry Laundry's blog, for a discussion of the Magic-T indicator, which he invented) which starts at the bull market top and is "rooted" in the March 2003 bear market bottom. The right side of the T gives us an estimate for when the subsequent bull market will end. As you can see, that right side is projected to end in May 2006, which means this rise could continue for almost one more year.

By the way, Terry has an interesting discussion today of the Decennial Pattern in the stock market.

Our main "lead dog" is the NASDAQ-100 Index, which warned of an approaching correction by topping days ahead of the rest of the market. The support polytrendline which we have drawn under the lows of the current rally projects a mid-July turning point which could actually be the low of the 10-week cycle, so we'll be watching this time period carefully for an opportunity to either buy (if it represents a significant low) or sell (if it represents a significant high). Here is that chart:

For Wednesday, we're smack dab in the middle of the Summer Doldrums and, for those of you who haven't experienced them before, it happens almost every summer as senior-level investors go on vacation and leave trading to the juniors.

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posted by Bob Carver  # 11:32 PM

The stock market rested Monday after several days of gains. Since the leading indices remained relatively strong, this should be a minor pullback as long as support trendlines remain intact. Although we think we're well past the halfway point of this leg up, we do think there is more to come in the weeks ahead.

It was clear that with the very modest decline on Monday the sellers could do very little damage to this market uptrend. After advancing into all-time new high ground day after day without a pullback for profit taking, volume dropped sharply as the market pulled back on Monday, which is always a bullish indicator that the pullback is a correction of the rally and not the beginning of a new downtrend. A continuing shallow pullback could setup a run into the next Bradley turning point in July. We continue to plan to raise some cash into the rally, which we believe will be the culmination of the 10-week trading cycle, after which a decline into a late Summer low is possible before another run, possibly to more new record highs, into the seasonal and 4-year cycle high due in September.

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posted by Bob Carver  # 7:14 PM

Stocks continued to soar to new all-time highs last week as several indices moved above their early March peaks, confirming that we have not yet seen the peak in the 4-year cycle in the stock market.

One of the best ways stock investors have been playing the commodities boom has been in the iShares Goldman Sachs Natural Resources Index Fund IGE, an ETF (Exchange-Traded Fund -- shares which act like mutual funds, but trade like stocks). This ETF is described by Fidelity Investments as seeking "investment results that correspond generally to the price and yield performance of the Goldman Sachs Natural Resources Sector Index. The Index has been developed by Goldman Sachs as an equity benchmark for U.S.-traded natural resource-related stocks. The Index includes companies in the following categories: extractive industries, energy companies, owners of timber tracts, forestry services, producers of pulp and paper, and owners of plantations."

Since November 2003, the fund has registered gains of approximately 66%. After a recent decline of almost 15% from its all-time high in early March, the fund bottomed in mid-May and has soared back to close at a new all-time high of $77.70 as of Friday. As you can see from the chart, the fund has closed above its upper Bollinger Band for two days in a row. Although a pullback within that band is very likely, this is a strong indication that more new highs are ahead:

The linear regression line (the gold line) in the chart represents an estimate of the historical trend of the ETF, and is rising at the rate of almost 30% per year. IGE is one of the ETFs we track in our new ETF Trader service which will be going live in mid-July.

In the past few weeks, as alternatives to trading individual gold mining and oil company shares, we have been recommending (on our Daily Volume Oscillator Charts pages for those sectors) IGE and IYE, a similar ETF, for those investors who are eager to play the current commodity bull market and are looking for an alternative to buying and selling commodity futures outright. That bull market has many years to run and we think buying dips is the way to go. For those who are price-conscious, selling rallies may be a way to enhance returns, although we never recommend going short stocks in a bull market. And this is definitely a very big bull market.

What's ahead for stocks this week? Subscribers will find our outlook ahead in this weekend's Detailed Comments Page.

Subscription prices increase to $233 per year from the current bargain rate of $79 on July 1st. Current subscribers have until their expiration date to renew at the existing rate. Note that the new rate is still a bargain.

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posted by Bob Carver  # 10:43 PM

The stock market continued into new high ground on Thursday as the 1700-stock Value Line Index joined the S&P 400 MidCap Index in rarefied and record territory as volume picked up from recent rather lethargic levels. It's a good sign when the broad market moves into new highs before the blue chips -- that's been the pattern this market has followed since 1999 in fact. Moreover, the gold mining stocks zoomed higher as well. Gold is on the verge of breaking out of its recent trading range. And, this was the case even though the Dollar Index hit a support line and rallied off it. It's not your typical gold bull market any more. Gold is moving like the currency it is -- and it's a wonderful alternative to the paper varieties.

However, there are definitely some storm clouds on the horizon which could change this bullish scenario. We'll talk about them in this weekend's update.

Friday is Quad Witching Day and will see the quarterly expiration of futures, options on futures, options on stocks and options on stock futures. Usually there's a bit of sound and fury, but given the weather and the proximity of the beach to Wall Street, slower summer trading is likely to continue.

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posted by Bob Carver  # 11:51 PM

The Dollar Index, which has been rallying hard in a bear market rally, has been clamping down hard on the stock market, sending it sideways in recent days, at least in the blue chip and high tech stocks -- the Mid Caps have made consecutive new highs this week. However, it appears that a short term top may be in place in the Dollar Index and, if so, the wind is again behind US stocks:

A falling dollar is just the remedy the stock market needs to get energized again, so if that 162% price level holds and the US Dollar even moves sideways, it would relieve a lot of pressure on the stock market. And, all indications are that the stock market, including gold and silver mining stocks, loves a weak dollar.

Now, some of you may think, "Why would the stock market love a weaker dollar?" Well, the reason the market loves a weak dollar is that it boosts exports by making US products and services cheaper for foreigners, plus it boosts earnings for companies like IBM which earn a lot of their profits overseas. It's not a coincidence that the policies of the Federal Reserve to reflate the US economy following the bursting of the Tech Bubble in 2000 centered around deflating the US Dollar -- the currency had gotten extremely overvalued in the 'Nineties when everyone wanted to invest in the US in some way or another. When the dollar came down substantially against the Euro, the US stock market was boosted back up the hill.

This may not be a long decline in the dollar beginning right here, but even a sideways move would be very helpful to the stock market. That is exactly what we've been looking for -- confirmation will come when the Dollar Index breaks decisively below the support trendline. But all indications are that the dollar has found at least a short term top -- and, possibly, a much longer term top. It's all good news for the stock market.

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posted by Bob Carver  # 5:52 PM

You may not have heard the news, but the stock market is at an all-time high as of the close Tuesday. No, not the darling blue chips of the last decade, of course. The winning sectors just keep on going higher: the S&P 400 MidCap Index closed at a record high on Tuesday of 684.13, exceeding the previous high record of early March by ¼%. Like the race between the tortoise and the hare, victory goes to the steady gainers. They may not win the dashes, but they give back so little in the corrections that they have been winning the race to the upside.

The NASDAQ-100 and Semiconductor Indices continued to drift lower in this mild correction, but each of those high-tech indices has retraced only small percentages of their recent rallies. And, they are showing signs of forming a low here as options expiration week grinds to a close. This looks like a cautious buying opportunity for those with cash to put to work.

Bonds: Good News is Bad News

In a normal environment, bonds love low inflation and falling retail sales, which is exactly what we got early Tuesday. So, what did bonds do when they heard the news? They headed in the other direction as if good news (for bonds) was actually bad news. After defying gravity for about a year, it looks like the bond market has finally waked up to smell the coffee. Oil prices are no longer the stimulus to higher bond prices they once were. And, always remember: it's not the news that drives prices -- it's the market's reaction to news that you have to pay attention to. When the market reacts well to good news (or no news at all), it's a bull market. When it reacts badly to good news, it's a bear market. The reaction was bad to good news, which tells us the bond market has turned from bull to bear -- long term rates are on a trend move upward (prices on a downward slide).

Now, this isn't really bad news for the stock market just yet. In a typical market cycle, the beginning of a rising interest rate trend will begin about 4 months before stocks form an intermediate top. That suggests we should be looking for the stock market to form an intermediate top in September. That's in line with our intermediate term Magic-T for the Russell 2000 and Dutch AEX Indices, which told us as much already. And, that makes sense from a seasonal perspective as the market often will make a top shortly after Labor Day (the first Monday in September) and decline, forming an intermediate term buying opportunity in the month of October.

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posted by Bob Carver  # 9:14 PM

What is the German DAX telling us about economic prospects in Europe -- specifically, Germany? Technically, it's saying the weak patch is over and business is picking up now that the Euro is removing some of the headwinds Europeans have been facing. Just as the fall in the US Dollar versus the Euro yielded an advantage to US companies which translated foreign earnings into more dollars, the fall in the Euro is pumping up European companies. This is being reflected in the recent very strong rally in the German DAX Index, which is on track to retrace half of the ground it lost in the early years of the Millenium:

The DAX Index hit an overhead resistance polytrendline on the daily chart on Monday (not shown) which may induce some profit-taking near term, but it is just going to provide another buying opportunity for European stocks. The Euro and the Dollar Index are into support and resistance, respectively, now and that will provide an excuse for the reaction. Our measured move target for this rally is 4713.11. The DAX closed Monday at 4599.21.

As far as the US market is concerned, the correction has not done a lot of price damage -- yet. But, a big retracement is always possible:

There could be a buying opportunity coming soon.

Geomagnetic Storm Caps Rally

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posted by Bob Carver  # 9:01 PM

Last week, the stock market continued in a corrective mode after its strong five-wave-up move up from April. We've been in "distribution mode" -- selling into rallies -- since the first part of June, building up cash to put to work in the next buying opportunity. If the rally from April to June was a first wave under Elliott, the current correction is counted as a second wave. Second waves typically will retrace anywhere from a third to two-thirds of the points travelled in the first wave (on average, one-half is a very common retracement). We'll watch our indicators like a pilot flying through heavy weather watches his instruments to guide him to a safe landing.

Euro Signals an End to the United Europe Experiment

The pattern is classic and may take some months to unfold, but it's a "Head and Shoulders" pattern in the Euro that signals a long term top is forming in the Euro:

Once the right shoulder of the pattern is built -- the Euro will rally in a countertrend move -- it will be virtually straight down into oblivion for the Euro.

Hints of what's to come were evident last week as the Italian finance minister suggested that country drop the Euro and return to the Lira. It's only a matter of time now as the forces play out in the destruction of the Euro. While that happens, the US Dollar continues to strengthen -- it takes a long time for the big money to move.

How do you benefit from the slow, lingering death of the Euro? Simple: as assets flow back into the US Dollar, they will naturally be looking for a good rate of return. The best place for that is the US stock market, which just confirms our technical studies which point toward a continuing rise in the market for at least one more year and, most probably, for another year after that.

Greatest Investment Bargain Will Be History Soon!

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posted by Bob Carver  # 6:19 PM

Note: our daily quote data is late in arriving, so the site's charts and indicators have not been updated as of the time this report was prepared. Hopefully, that data will be available by Friday's opening.

Stocks rebounded Thursday as they seemed to find footing near the middle Bollinger Band on many of the stock indices. After outsized gains since the April-May lows, a period of consolidation seems to have taken control of the market, with neither bulls nor bears showing the strength it will take to break out either up or down. Option speculators did not turn bullish on the rally, so there's a healthy degree of skepticism that should provide support under the market.

As we said Wednesday, stocks had worked off their overbought condition. Thursday's early selloff was pushing them into oversold territory when footing was found and they rallied back. But, with no clear direction and option expiration coming at the end of next week, the most likely course for the market is to settle into Maximum Pain, the price at which the largest number of options expire worthless. Currently, those Maximum Pain points are 37 for the QQQQ and 119 for SPY, both of which are just below current levels. For option sellers, it's an ideal situation which is likely to lead to collecting premium on both calls and puts which have been sold short.

All of this is longer term bullish, but probably favors the sideways path the market is likely to take to reach the next rally we discussed previously, as opposed to the sharp correction path. As we said, this is the path the market likes to take because it tends to reward those who are betting on the median path of least resistance.

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posted by Bob Carver  # 10:25 PM

The extreme overbought condition of the market has been relieved as of the close Wednesday and, as volume lightens on the decline, we expect to see buyers stepping up to the plate in coming days. The market attempted to rally back Wednesday morning, but sellers dominated the intraday action as weakness in NASDAQ, a leading indicator for the market as a whole, warned that the rise would not last.

Although we had been thinking that a longer period of distribution might take place here, the decline actually increases the chance of a better rally down the road. For one thing, option speculators are getting pretty bearish, with the OEX traders putting only 74¢ into call options for each dollar into puts. It's typical to see about half as much money going into calls compared to puts as a trading bottom is at hand within a correction.

For another thing, the next Bradley turn is nominally Thursday, but the error bar is ±4 calendar days on that indicator, so that doesn't mean we will get a reversal immediately -- but a rally into that turn would have been more bearish. A sharp decline into Friday would almost certainly setup the right conditions for the end of wave a down in a correction and the beginning of a nice wave b bounce back to retest trading highs. After that bounce, a sharp wave c decline would clear the air, as well as the sell stop orders traders have put under their positions and that could lead to the beginning of the next big leg up.

With options due to expire at the end of next week, we usually get some volatility occuring about a week before the actual expiration as players roll positions over to the next series to avoid waiting until the last minute. And, with Quadruple Witching coinciding with option expiration this month, some extra volatility may come into the market soon (Quadruple Witching involves expiration of futures contracts as well as options and occurs in March, June, September and December, leading to enhanced volatility).

We would like to see the market retest recent trading lows established just after the big surge higher on May 18th. Tests on lighter volume would open the door for a new round of gains into the traditional July-September "Summer Rally" period.

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posted by Bob Carver  # 10:50 PM

The stock market rallied nicely Tuesday morning, giving traders a good opportunity to cash in some their recent short term profits, but then a red STORM! warning popped up at the bottom of our Trading Page, alerting us to a surprise geomagnetic storm that had broken out. The rally stopped dead in its tracks and, eventually, stocks went sliding back down the hill. Not a coincidence, since a geomagnetic storm shower has a tendency to cause traders to become anxious and, with so much profit built up over the last month, the temptation was great to cash in their chips.

If the market can shake off this latest bout of anxiety, we might see a challenge of Tuesday's high water mark later in the week. And, high it was: the S&P 400 Index of MidCap Stocks scored a new, all-time record high Tuesday with a reading of 683.73, slightly surpassing the old high record set on 7 March 2005. So far, it's the only stock index to score a new high since March. But, most broader market indices like the Value Line, Small Cap S&P 600 and Russell 2000, are all very close to new high records and may just get there soon. Although you may hear the CNBC talking heads refer to the S&P 500 Index as a "broad" index, they're wrong -- it's a narrow blue chip index which does not represent the broad market in any way. And, of course, it's far, far below its record high set back in the spring of 2000.

Bottom Line If the storm subsides "and the creeks don't rise", you may have a chance to finish your selling over the next few days.

Sneak Peak: For those who want to sample our new ETF Trader service, just go to MyClues for a free preview. Click on the ETF Trader link on the page near the top to reach the new service.

For additional commentary for subscribers only, please use this link: Daily Chart Comments (comments there may be posted by the next US trading session).

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posted by Bob Carver  # 6:29 PM

The underlying uptrend held the retracement to a shallow level. Weaker stock indices found support on the middle Bollinger Band (20-day moving average) while the stronger indices held well above their middle bands.

The next Bradley turn is due this week with a center date of 9 June (Thursday) ±4 calendar days, which covers this whole week for a trend change. Coincidentally, the market is forming several short term polytrend support lines that peak within that same timeframe. If the market is ending its first leg up, we could have a steep second wave correction going into July. Our recommendation is to start selling into strength here to take profits and replenish the sideline cash, but retain a core position for the longer term trend and for buying opportunities on dips.

As you probably know, we're going to soon introduce our ETF Trader service. We're in "shakedown" mode now to see what loose bolts fall out of the machinery before we go "Live" and we're going to open it up for everyone for the next few weeks for free. To check it out, just click on the regular subscriber link and when you get to the form where you enter your email address, just enter "etfguest@marketclues.net" (without the quotes of course). That will take you to the MyClues website, where you can access ETF Trader by clicking on the link near the top of the page.

For additional commentary for subscribers only, please use this link: Daily Chart Comments (comments there may be posted by the next US trading session).

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posted by Bob Carver  # 5:59 PM

The markets reversed course sharply Friday based on some very flawed data -- as usual -- from the government. The Labor Dept. reported that a shockingly low number of new jobs were created during the month of May. The only problem we have is that the error bar on that number is more than ±200,000, far more than the actual number being reported! We believe the government is doing a total disservice to the American people by releasing this flawed data and that they should wait until they have data that is accurate.

In any case, the market took the data at face value, as it always does, and it sent stocks tumbling, bonds soaring and then plummeting, and the dollar falling, then rising again. In other words, nobody knew exactly what to make of the data (which is fitting since the data didn't make any sense).

The better data is found on a back page of the report. The raw data shows the true unemployment rate has fallen from 9.3% to 8.6% over the last year. That's an annual improvement of 7.5% in the employment situation. This is an economy which is producing few jobs, but it's not a producer of no jobs as some would have it. But, more to the point: it's an economy where earnings growth is robust due to rising productivity, but productivity does not create jobs. So, the bond market rallied initially on the thought that "falling job creation = soft patch = falling economy". Then, they may have realized that the data was basically garbage -- after all, the same report said the unemployment rate held steady at a rock bottom 5.1% (the real rate actually dropped from 8.7% to 8.6%) and that isn't a sign of a collapsing economy. Thus, bonds reversed course with a resounding intraday crash.

Stocks had been "cruisin' for a bruisin'" by rallying almost non-stop from April -- the NASDAQ-100 Index (parent of the QQQQ) was up 12½% in 5 weeks! That kind of overbought condition just begs for a correction and the garbage data was apparently enough to kick it off. But, unless the market tells us otherwise, we're looking on this as a minor retracement and a setup for another buying opportunity with new cash.

For the bonds, it may have finished the rise with interest rates putting in a long term double bottom. A related sector, the realty stocks, put in a very convincing top and look ready to hit the skids big time:

Subscribers, look for our Detailed Comments update on Saturday.

For additional commentary for subscribers only, please use this link: Daily Chart Comments (comments there may be posted by the next US trading session).

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posted by Bob Carver  # 12:35 AM

The market continued higher Thursday, but the weight of Friday morning's Employment Report seemed to weigh on it. Despite that weight, the leaders continued to lead and the stragglers continued to rise. Sentiment was basically neutral ahead of the biggest news of the month from the Labor Department due out at 8:30am EDT Friday.

Last month, the Labor Department took a modest report and turned it into a blockbuster through the magic of statistical modeling (the CES Birth/Death Model, which attempts to correct for missing data using a sophisticated model which imputes jobs which were overlooked in the counting). The B/D Model for May 2004 (and most May reports in years prior to that) added about 195,000 "phantom" jobs to the reported figure, so if the model holds true to its historical record, we are likely to see a headline number that's "pleasingly plump" to the stock market. The bond market, on the other hand, would prefer to see the economy fall off a cliff and abhors such large numbers. In any case, we'll know shortly what the number is.

Investment Methodologies: Accumulation and Distribution

While the short term traders don't find longer term scale-in/scale-out techniques useful, most investors should focus on the longer term trends. After all, most investors are in it for the trend moves for as long as those trends last. We like to approach the market from an investment point of view where we are in one of four stances toward a sector at all times:

1. we want to be buyers when accumulation pressure (buying) is strong and prices are down;

2. we want to hold a position (long or short) when a trend is in progress;

3. we want to sell into price strength when distribution (selling) pressure is strong; and

4. we want to be out of a security, or flat, when direction is not clear.

Here is a chart of recent action which illustrates some of these principles using the DIA, which tracks the Dow Industrials Average quite closely:

Right now, our stance toward the Dow is Holding. This chart was presented only for illustration -- the DIA has been by no means the strongest sector we accumulated during the March-April Accumulation phase. If you didn't buy during that phase, there will always be another opportunity that will come to those with patience.

For additional commentary for subscribers only, please use this link: Daily Chart Comments (comments there may be posted by the next US trading session).

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posted by Bob Carver  # 9:46 PM

Federal Reserve Bank of Dallas President Richard Fisher said on CNBC Wednesday morning that the Fed is in the 8th inning of a baseball game when it comes to raising interest rates. Moreover, the June meeting is the 9th inning, implying that the Fed will pause. Although the Fed later distanced themselves from Fisher's statement, the writing is clearly on the wall now that the Fed is unlikely to hike rates any further in this cycle. This would also fit the historical pattern where the Fed stops raising rates shortly after the ISM Index drops below the 53 level, which it did last month. This month's ISM came in at only 51, meaning that the manufacturing economy is only barely growing. A value less than 50 indicates a manufacturing recession in progress.

The stock market reacted to the unexpectedly good news by taking back all the points lost in Tuesday's profit-taking session and then some. As usual, the Homer Simpsons of the OEX pits were wrong to buy puts and the big buyer in QQQQ calls was right. In fact, volume continued very high in the QQQQ options: total dollar volume in calls was $10,104,200 on Tuesday and soared to $16,058,400 on Wednesday. The last time this manager "loaded the boat" on QQQ call options, he did so over a 3-day timeframe.

A rising stock market lifts all boats and creates its own "Wealth Effect" which stimulates the economy. While the Fed may be pausing here, a pickup in growth could start them moving again.

There's a ray of light for the Homer Simpsons of the OEX pits: the stock rally is gradually losing momentum on the short term. The bad news is that even a solar flare Monday and the resulting geomagnetic storm couldn't keep this market down for long -- typically, geomagnetic storms have an adverse impact on the market for about a week. The momentum of the rally is gradually slowing and, if it continues slowing at the same pace, we could have a multi-day correction starting sometime next week and bringing the market back down to retest last week's lows. That won't be enough to rescue all those put buyers, but it could keep them bearish, especially if they turn bullish over the next week after being greatly frustrated by this soaring market. And, it would provide a nice dip for us to put additional money to work in the market.

The broad market is very close to setting a new all-time high record. It would only take a rally of 1% for the S&P 400 MidCaps to get there; the others are lagging just a bit, but none are very far from their all-time highs now. The broad market ETFs (IJR, IWM, RSP and IJH) have made us a lot of money over the last couple of years while the crowd focused on the laggard Dow, S&P 500 and NASDAQ. Somehow, they never figured it out. This chart demonstrates that it's not just real estate that's growing at about 50% per year:

The NYSE halted trading four minutes early at 3:56pm EDT Wednesday afternoon due to a communications failure, but said that trading will resume on schedule Thursday morning at 9:30am EDT. The early halt may affect share volume comparisons, but should not have any lasting effect upon prices.

The Dutch have good sense, too. On Wednesday, they voted overwhelmingly (61.6% voted no) to reject the European Constitution, following the lead of the French. This probably has sealed the fate of the Euro, which does not now appear to be a viable challenger to the hegemony of the US Dollar as the planetary reserve currency. Fiat money now sinks or swims with the dollar. Maybe we have finally reached the stage where Gold and the US Dollar rally together as the only two viable stores of wealth?

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posted by Bob Carver  # 8:44 PM