Market Clues

Despite the news coming out of the South (or, perhaps as a result of it), stocks rose on Wednesday, the last trading day of August. Some attributed it to the "broken glass" phenomenon (when a pane of glass is broken, its repair feeds money into the econony in the short run) and with damages estimated at $25 billion, that's a lot of stimulus. For whatever reason, the technical underpinnings of the market have been painting a picture of a market which has been well-bid, especially when it probes near the lows of the last week.

And, of course, our short term sentiment measures have picked up some very bearish traders out there in the last week. That "sea of puts" makes it very difficult for put buyers to make any money. Even during the downdrafts, OEX put holders have been finding the pickings slim over the past couple of weeks, then nonexistent when the market bounces back. They weren't quite as bearish on Wednesday, but still poured only 76¢ into calls for every dollar they sank (literally!) into puts. Those are numbers the bulls can definitely hang their hats on.

One of our favorite sectors, one we've made a lot of money in this year, was also one of the strongest ones again on Wednesday. When it and the other measures of the broader market outperform the blue chips, you can only conclude one thing: the bull trend is alive and well in the stock market.

One of the weakest sectors, the Dow Industrials, was only able to move back up to the top of this week's price range, which suggests it may need to make a lower low before we get the trend to the upside firmly established.

But, with breakouts all over the broad market, the uptrend is beginning to establish itself during this Monthly Buying Spree. Like last April and May, expect retests of the various supports shown in the daily charts before we get substantial moves to the upside (on other than a trading basis, of course).

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posted by Bob Carver  # 9:56 PM

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The stock market continued to be well-bid as buyers were given the chance to prove their mettle again on Tuesday. And, indeed they were there to scoop up bargains. While the lowly Dow Industrials and S&P 500 (the so-called 'Poos) came all the way back down to retest Monday morning's lows, the strong, robust sectors said, "See ya, don't wanna be ya!" and held to very modest retracements of Monday's rally. That's a sign of a very strong market trend to the upside.

We're finally there -- the Monthly Buying Spree -- that time of month when the buyers come into the market with fresh cash to bid prices back up (probably after doing much of the selling in the days leading up to the spree, in fact). New cash is the lifeblood of the market and this is the time of month when pension fund contributions come pouring in the door. However, this doesn't mean the market won't be retesting the lows (and breaking them again in the case of the lowly Dow and 'Poos). It's those retests which will give buyers additional opportunities to accumulate stocks at more advantageous prices in the weeks ahead as the 20-week cycle bottoms and turns up, heading for the 4-year cycle high due in 2006.

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posted by Bob Carver  # 9:58 PM

The stock market found buyers early Monday morning as the Dow dropped to 10,350 initially on news, then turned up and rallied 138 points on higher energy prices. This should put to rest the idea that the market is "driven" by news. Clearly what happened was that buyers were interested at the lows of the day and sellers were not.

By the way, the journalists always will claim that "news drives the market". Just what do journalists do? They stand outside in the middle of one of the worst hurricanes in recorded history. Take it from us: they know as much about the market as the average high school dropout.

The stock market is still on track to put in a nice bottom very soon, a bottom which is likely to correspond to a major bond market top. As you can see from the progress shown in this chart, our polytrendline has accurately shown the path of this market in the widely-watched Dow Industrials -- that polytrendline has not been updated in the last two weeks, but the market knows where it is:

Despite the huge rally on Monday, OEX speculators are still extremely bearish. After last Wednesday's overly-bearish reading, we were on alert for a trading bottom to occur 2-3 trading days later. Indeed, Monday qualified as the 3rd day and we got a strong trading rally. Remember, we're coming up on the Monthly Buying Spree and the 20-week time cycle low.

The sectors we mentioned as leaders over the weekend took off and soared in Monday's market. That commentary is, of course, reserved for subscribers. This public commentary is free for all.

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  # 7:43 PM

Geomagnetic storms and landing time cycles dominated trading in stocks last week. By the end of the week, those storms had died down. But, they are a reminder that forecasting geomagnetic storms and coronal mass ejections from our nearest star is a very difficult proposition.

The storms came as the market was wending its way into the 20-week trading cycle low due in the next few weeks and at a time when many of the big players were on August holiday. Sellers clearly had the upper hand in last week's market.

But, there were definitely signs of strength if you look at the market with good instruments. A change for the better is coming very soon and you may be very surprised that strength is showing up in a part of the market we thought might have lapsed into a coma. Yes, some of our old money-making sectors are apparently gearing up to lead the charge up the hill once again and we're getting on board those sectors in a big way.

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  # 5:34 PM

Despite the fact that the stock market is in the final approach to a 20-week cycle landing, the bears just seem to be able to move the market down in relatively small spurts, suggesting that we're simply seeing a buyer's strike (more likely, a vacation) that allows a shallow drift to lower levels on light volume to occur.

While the Dow's moves have been just a bit more dramatic, most of the market has retraced little of prior months' gains to date. Whether it will do even 50% is a bit of a question at this point. Generally, a sharp decline will form a momentum low which is subsequently tested on lighter volume. But, this trading cycle has not seen more than a spurt of selling pressure before the bears backed off, just as they did Thursday.

This is typical of the August Doldrums. It's why the old Wall Street adage of "never short a dull market" probably began. The long term trend is up and trying to argue that the market is overvalued is like arguing with a brick wall -- you'll never win and most folks will decide you're a few fries short of a Happy Meal. After all, the market spent most of the 'Twentieth Century in undervalued territory -- who can claim it won't spend as much time in overvalued territory (which, by our technical reckoning, has been the case since 1995, having emerged from a 65-year period of undervaluation), as the following quarterly chart of the S&P 500 illustrates:

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posted by Bob Carver  # 11:07 PM

The market was hit by selling Wednesday afternoon as the gentle slide down the hill accelerated. We're coming into a cycle low and the geomagnetic storm certainly catalyzed the short term trend. We regard this is a positive, giving us better prices to buy as it creates the fear necessary for the market to climb the Wall of Worry.

Several people have asked for more information about Magic-T Theory, so here is our capsule summary of it:

"Magic-T Theory" or "Matched Trend-Time Theory" was created by Terry Laundry -- http://ttheory.typepad.com/terry_laundrys_t_theory_o/ -- in 1973 after observing "that certain simple equity price indicators of general market behavior do demonstrate a basic market principle; namely that a period of price rise tends to last only as many weeks (or months) as the prior period of price decline." (cf. http://ttheory.typepad.com/terry_laundrys_t_theory_o/price_ts/index.html )

This simple concept held true very well in the 'Seventies as the market as a whole simply treaded water sideways for years in a trading range (much like the Dow Industrials are doing here in the 'Naughties). When the long bear market of the 'Seventies transitioned into the dynamic bull markets of the 'Eighties and 'Nineties, Terry developed modifications to the theory which used technical market indicators to measure declines and advances. Those indicators, detailed on his blog referenced above, allowed him to recognize when to buy into the market and when to sell and stay in cash awaiting the next buying opportunity.

The left side of a Magic-T represents an accumulation phase as the big money positions itself for the coming advance. During a bull market, prices on the left side of a T may be mostly rising, but generally either rise at a slower pace than on the right side, or decline outright. At the centerpost of the T, the market transitions to a distribution phase as prices accelerate through the right arm of the T and the big money starts taking profits by selling to the weak hands who were mostly selling at the centerpost and who, inevitably, are buying as the right edge of the T approaches.

This has been our own capsule summary of Magic-T Theory. Much more background information is available on Terry Laundry's Blog Site. Terry usually has an audio update on Thursday mornings.

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  # 6:34 PM

While the blue chips consolidate around support lines, the leading indices continue to show strength, confirming that the longer term trend remains up in stocks. OEX traders continued to press the put side, buying almost twice as much worth of puts as calls Tuesday. They are definitely "in the zone" where stock market bottoms occur, as you can see on this long term chart of the OEX:

Saluting a Master: James M. Hurst, 1924-2005

Many of you may not have ever heard of James M. Hurst, but he was quite influential in the field of technical analysis, specifically in cycle analysis. Many technical analysts cite his classic The Profit Magic of Stock Transaction Timing in the early 1970s as a turning point in the development of their careers. J.M. Hurst, born in Salinas, Kansas on the 2nd day of September 1924, was an aerospace engineer for many years before turning his attention to cyclic analysis of the stock market. He became an expert in digital computer technology and devoted ten years of research to develop his mathematical models of stock market behavior, publishing Profit Magic in 1970. It was the first time anyone had applied the new and radical tools developed for aerospace research to the markets and his book laid out a model which has stood the test of time. Considering that today's computers are millions of times faster than those Hurst had available at the time, it's amazing that he was able to accomplish as much as he did at the time. Moreover, to publish the results of this research in a $4.95 paperback edition was unbelievable considering the tens of thousands of hours of effort expended on it, a feat which would be totally unheard of now.

After publishing the book, Hurst gave seminars on his techniques, but was basically a very private person and dropped out of the public spotlight for decades. Ed Dobson of Traders Press was able to contact Mr Hurst back in 1998 and obtained permission to republish Hurst's Trading Course, which had been out of print for decades. James M. Hurst died last Tuesday, the 18th of August, in Roseville, California. Thanks to Tom O'Brien for interviewing Mr Dobson on his Tuesday afternoon show on http://www.TFNN.com/ for providing this information. The archive of that show is available at http://www.tfnn.com/mp3s.php (the link is labeled TOS082305 and the interview starts at the 1:12:30 mark in the archive).

Hurst's cyclic analysis techniques, though, will last forever. We used some of those same techniques, although with a few tweaks of our own, to develop a model of the stock market (our Omega Predictor) in the mid-'Eighties which predicted the runup in early 1987 -- and the big drop in October 1987 -- ten months in advance! In the 'Nineties, we projected the decade ahead and it gave a clear roadmap for the trend, showing a rise into mid-decade, a flat market for most of 1994, then a continuation of the bull market run into the late 'Nineties.

The Master is gone now, but his work is immortal.

Free Week at Elliott Wave International

The theme is currency trading this week as EWI opens its door for another Free Week. All you have to do is be a member of Club EWI. If you haven't registered, you can do so using this link: http://www.elliottwave.com/a.asp?url=/freeweek/&cn=mcb

Free Week starts Wednesday at 5pm EDT (21:00 GMT, or 7am AEST on Thursday).

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posted by Bob Carver  # 11:10 PM

One of the most reliable sentiment indicators around is based upon the behavior of OEX (S&P 100) Index option traders. For some reason, these speculators just can't seem to get it right very often on what direction the market is heading toward. Their pain, however, is our gain because we monitor their total dollar purchases of puts and calls and find the statistics very useful.

A couple of weeks ago, they were so bullish that when the market started down the slippery slope, they decided it was a grand opportunity to buy call options. Now, options are a wasting asset, which means that time is the big enemy to an options speculator. In order to make money, the market has to move -- and move fast! -- in the right direction. In this case, the right direction would have been up. If the market does anything else, such as going down, sideways, or even just going up a little bit, the option speculator can lose money as time premium dribbles out of his/her call options like sand through an hourglass. Consequently, when an options speculator buys calls on a dip, it's very unusual behavior because he's betting that the market is going to immediately change trend strongly into a rally.

Unfortunately for option specs, the market has just drifted lower since then, causing all of those "eager beavers" to lose money. But, on Monday's rally, then dip, OEX speculators exhibited exactly the opposite sentiment: they bought puts in quantity. Will they be as wrong this time as they were a couple of weeks ago? They almost always are, but of course, no indicator is 100%. Also, remember that typically the indicator will be a few days early.

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  # 10:04 PM

The current bull market started in March 2003, which was the absolute price low in a number of stock markets around the world, including the New York Stock Exchange Index. The bull market is now 637 trading days into this marathon run to the upside and the leading stock indices which got us here are showing signs of fatigue. We're clearly transitioning into the End Game for this bull market, the timeframe in which the leaders falter and new leaders hopefully come forth to take their places at the front of the pack. It's not as easy to make money on the long side, but it is still a bull market even if its end is on the way.

Last year, the market rally kicked off from a 78-week cycle low. When we constructed a polytrendline along the rally highs of the S&P 500 Index, we projected it forward into the future. That polytrendline serves as an "envelope" which clearly shows the 78-week cycle. It peaked in mid-May, almost coincident with the trading low in the S&P 500 Index, which illustrates that a cycle low does not always correspond with a price low in the market, a common misconception. That polytrendline has not been changed since we originally constructed it in February 2005, but the evidence clearly proves the market still knows exactly where it is.

After the corrective activity in the first half of 2005, the subsequent rally carried the S&P 500 Index all the way back to test that overhead trendline once again on the 3rd of August. At that time, the polytrendline was at 1245.75 and the S&P 500 made a high that day at 1245.81, only a phenomenal 0.005% above the trendline almost a year after the highs which were used to construct it!

The significance of that retest is that the market immediately pulled back, then again retested the trendline on the 10th of August. At that time, the trendline was down to 1243.18, but the index only made it as high as 1242.62 before turning back down, a sign that the market was under control of the sellers. Since then, the index has fallen as low as 1215.93 (on Thursday of last week) as the trendline continues to descend and the sellers remain in control.

While the sellers are still in control, they are in control only because the buyers are on August holiday! This means that control of this market could be wrested back simply by some of those buyers jumping back into the market when they get back from holiday. In fact, you can see from the chart above that there is a rising short term support trendline just under the market. If the market is able to form a base along that support line (and that could be very soon), it might be able to mount a rally that punches through the overhead resistance trendline. And, that would be an extremely bullish development indeed because it would mean another run to new all-time highs before the bull market is finished!

Note that the "longer term polytrendline" illustrated in the chart above is constructed using the significant lows within this current bull market. That longer term line is continuing to rise into early 2006 and that tells us the bull market trend is still alive and well. In fact, that longer term trendline is very likely a good estimate for the "4-year cycle", which last bottomed in October 2002 and is due to top in early 2006, before plunging to an October 2006 low. It also tells us that those who sell this market short are swimming upstream. Certainly, that's possible, but it's easier to swim with the current rather than against it, as any salmon will tell you.

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  # 5:57 PM

Every month on the 3rd Friday, options expire and when the trend is basically neutral, volatility is usually very low. Since the brief spurt of volatity last week, the market has seen lower and lower daily ranges. This behavior is part of how the option writers "park the cars" to maximize their "take" of option time premium. Options are a wasting asset and it's no puzzle that blatant manipulation of stock prices every month brings joy to option writers' accounts.

While the broad market has been declining in this correction, the blue chips have remained relatively stable. Bonds benefitted from prior stock volatility as "hot" money fled the stock market, seeking the relative safety of bonds. But, with stocks beginning to stabilize, the run to the upside in bond prices (the downside in bond interest rates) seems to be nearing its end. Is it time to start thinking about selling bonds short again and buying stocks? We think that time is coming and moves in both markets could be quite profitable. The stock market needs to form a bottom and that could happen in the near future as the 20-week cycle is due to bottom within the next few weeks. That 20-week cycle would mark the midpoint of the 39-week cycle and we generally will get a multiweek rally after the shorter cycle lands, so it's important to watch the indicators, for they will tell us when the market is ready to roll to the upside once again. This coming trading rally may be the last good rally before the 4-year cycle peaks, ideally in January 2006.

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  # 11:06 PM

The strong hands in the stock market certainly have a flair to their manipulations of stock prices and crowd sentiment. After so-called "bad news" about inflation (the PPI rose at an annualized rate of more than 12%), stocks rallied. But, underneath the surface, the strong hands were not so strong at all -- they were desperate to sell their shares and levitated prices higher in order to dump them on the weak hands, who tend to be buoyed by such drama. One impetus to keep prices up this week is that it's options expiration and the strong hands wouldn't want to have to pay up on puts.

Once the strong hands are finished with their manipulations, probably by Friday at the close, there may be little support left for this market. In fact, the pattern in the Dow suggests a sharp wave down coming up:

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).

For additional chart 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  # 5:02 PM

In recent years stock market volatility has been so low that if the chart of it were a cardiogram, you'd have to say the patient was near death. But, on Tuesday, we finally got volatility, but at only about the average level over stock market history. Investors who have grown complacent at the gentle wash of the Dow waving back and forth in its six-year-long trading range might be concerned at the sudden moves, but that's what corrections are all about -- correcting investor perception of risk.

Traders are certainly not complaining. Volatility breathes life into trading accounts. Tuesday morning, all of our short term trading indicators triggered sell signals as the market started sliding down the slippery slope. Our count is that we have entered wave 3 to the downside and that's the strongest wave (usually) in a five-wave down sequence.

Bonds benefitted from flight-to-quality buying pressure as hot money shifted from equities to debt instruments. The long bond ended up 16 ticks (32nds) and the 10-year was up 12/32nds. Commodities were mixed, with oil up a little. Grains tumbled sharply lower as they appear to be in the middle of a strong impulse move to the downside, headed for some great bargain prices in the near future.

But stocks got the headlines as decliners took a huge lead over advancers into the close. The number of new highs on the NYSE totaled only 50 to 23 new lows. Volume also picked up on the breakdown, which says the downtrend is simply shifting into a higher gear here. But, overall, corrections are healthy because no bull market can advance when everyone is bullish -- after all, they've already bought! It needs to shake the money tree from time to time to dislodge the loose fruit.

At the present time, we are mostly in cash, willing to buy only ETFs which have shown good accumulation characteristics over the past weeks of market action. These leaders are likely to pull through the correction in good shape and what better time to buy than when prices are on sale?

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  # 10:46 PM

Another day of trading range moves in the stock market characterized Monday's action. The Dow formed an early low at the bottom of the range and rallied toward the top of the range, although it didn't quite make it by the end of the day. 10,625 is the price we identified on the charts some weeks ago as something of a pivot around which the market would hang. And, that has been the exact middle of this sideways pattern. We alerted traders to the rally early Monday and, although we don't always issue day-trading alerts, Monday was one of those.

But, that doesn't change the fact that this is likely to be just a trading range move, at least for a little while. And, it doesn't change the fact that we're in a correction of a fairly sizable move off the April-May lows, so the potential for a much larger dip remains strong.

Looking forward to September, it appears that we'll see some significant intermediate term trading opportunities not only in stocks, but in bonds, grains, and potentially, currencies. So, as the dog days of August wind toward the traditional end of holiday season at Labor Day (first Monday in September), we look forward to all the opportunities that September will bring.

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  # 10:27 PM

The Fed has been raising short term interest rates continuously for more than a year, ostensibly to fend off rising inflationary forces, but more likely to prick the housing bubble. Will this rising rate policy continue? The Fed itself says, "Yes!" However, there is a limit to where the Fed can go with short term rates. That limit is a negative yield curve.

The yield curve, for purposes of this discussion, is defined as the difference between the 10-year US Treasury Note rate and the 90-day US Treasury Bill rate. When that difference, which is usually positive due to the extra risk entailed in holding a long term note which could be ravaged by inflation, dips to and/or below the zero line -- i.e., short term rates rise above long term rates -- a recession invariably ensues within a matter of several months. The Fed knows this fact of economic life and will -- if it knows what's good for it and the economy -- stop raising rates if the yield curve is in danger of going to zero. As the following chart illustrates, that prospect is growing closer by the month:

How To Recession-Proof Your Portfolio

If the yield curve does hit the zero mark, you should immediately sell any stocks you hold. The stock market's performance after the yield curve hits zero has historically been abysmal. You should then purchase long term bonds and sell short term bonds short because the yield curve would then have very limited downside risk. Such a spread -- long the long term bond and short the short term bond -- is likely to zoom higher just as it did in the past.

However, remember this is only if the yield curve hits zero or below. Subscribers will find the yield curve chart updated every day on the Daily Spreads Charts page -- look for the chart labeled "TNX-_IRX 10yr-Short Term Rate Spread x 10".

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posted by Bob Carver  # 9:32 PM

Apparently, this stock market trading range is getting pretty boring to some of you, who want (or need) action. If you watch the Dow, it's gyrating wildly toward the top of the range, while most of the market sits much lower down in the range. That's not particularly bullish and we see no reason to take intermediate term positions with the odds favoring further sideways action. In other words, the risk/reward just isn't that great right now, especially compared to the low-risk buys we made earlier in the year which paid off so handsomely by the beginning of August.

That's not to say we have anything against day-trading. With day-trading, you minimize risk by flattening positions by the close, but during the day, positions are generally highly leveraged ones which can quickly go either way. Indeed, we have made a good living engaging in just that in times past. But, if you do that, don't expect us to lay out an intraday roadmap for you. While some may claim to be able to do that, we've seen every one of these intraday strategists "come a cropper" at some point and disappoint. Whether that's because too many caught onto the game, or whether the market just morphed into a different mode is impossible to say (we lean toward the latter explanation). But, day-trading is a very hard job which demands nerves of steel in a pressure-cooker environment, requiring constant concentration in order to take positions ahead of the thundering herd. It can be done, but there are a lot of other jobs which are far easier.

So, for now, we feel the risk/reward is high for holding positions overnight and are quite pleased to stay in cash awaiting the next set of signals from our indicators. We do expect the intermediate trend to remain up into next month, so we do expect to get a buy signal. We are not interested in short positions unless and until the intermediate-term trend is down (yes, the trend is your friend, as it will forgive a too-early position more often than not). In fact, it appears that the crowd of short term option traders is quite bearish as they concentrate on put purchases. That's providing a cushion underneath the market right now. Such a sea of puts has been known to levitate the market right into options expiration (this month, that's next Friday). If most of the puts expire without being rolled to the next month, an air pocket can easily send the market sprawling right after the third Friday. And, that would almost certainly be a buying opportunity for the last run up to the seasonal high due in September.

But, if you feel the bulls have the upper hand, just take a look at our lead dog index, the NASDAQ-100, and think about the implications:

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posted by Bob Carver  # 10:39 PM

The fake rally the stock market had on Wednesday was as real as a wooden nickel and it ended like a lead balloon. The blue chips dashed to the upside while the lead dogs and fellow travelers of the broad market said, "Thanks, but no thanks!" By the end of the day, a little green showed in some places, but red was the preferred color, especially in the NASDAQ, where the advancers were swamped by decliners.

Although we can't say when this will end, we can say that there's no way we'd be suckered into a market as weak as this one is. It's very likely that we'll get a much better buy point sometime later this month or early next month.

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posted by Bob Carver  # 10:59 PM

The Fed just keeps on hiking interest rates and the markets actually celebrated the occasion Tuesday. Being that both the bond and stock markets were somewhat oversold short term, the bounce isn't really out of the ordinary. It wasn't too hard to tell there wasn't much conviction behind the rally, though, as advancers barely edged decliners on the NYSE and actually lost by a slim margin on the NASDAQ. When the generals are up while the troops are retreating, you just have to know that the first leg down was just the first shoe dropping. The second shoe dropping could get a lot more attention from the buyers if the indices track some of the support polytrendlines on their way down.

The second leg down could actually turn into somewhat of a panic move, given that both bonds and stocks are finally headed in the same direction -- down. That's why we're not anxious to get back into stocks (and certainly not ready to cover bond shorts). The Dow Industrials pattern suggests that a move down of several hundred points is not out of the question this month. Remember, August is one of the worst months in the stock market. This one is promising to be a typical August. The good news is that if we do get that strong leg down, it would setup a much stronger leg up from lower prices.

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posted by Bob Carver  # 11:00 PM

This stock market is doing what it can to flush out the weak hands, while the strong hands do some buying on the dip. We're heading for that opportunity soon, but we reserve those details for our subscribers. Suffice it to say that with OEX speculators pouring almost twice as much money into downside bets, the buying opportunity is coming.

However, we've come a long way off the last intermediate bottom -- and have great profits which we locked in near the trading high -- and once this correction is finished, the last rally is likely to be somewhat disappointing. Still, the market has not made a final top yet and we're not turning bearish just yet. Prudently in cash, yes; bearish, no way.

Last week, the Magic-T indicator which called the last two stock market tops to the exact day was featured here the evening before the last high. But, we have other indicators which are good at calling bottoms, plus the Magic-T can call bottoms, but in a reverse sort of way. We'll be discussing those bottom-picking indicators this week, but necessarily for subscribers only.

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posted by Bob Carver  # 11:25 PM

After buying the lows of a few months ago and selling the highs, we're in cash right now and simply waiting for our indicators to give us the next buy signal in stocks. And, as a bonus, our short bond mutual fund position is earning us positive returns as interest rates climb up the hill.

The economy is doing great, with employment gains showing almost 200,000 new jobs being created each month and the official unemployment rate running right at 5.0%. A strong economy is anathema for bonds and causes interest rates to soar. At the same time, as long as earnings are climbing, interest rates are still relatively low for companies and should not provide much hindrance to the stock market. However, this short term correction should help setup another leg up and our indicators are designed to tell us when to "get back into the water."

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  # 4:08 PM

The stock market gave back some of its gains Thursday as sellers finally got a foothold on the market. It's likely that the buyers are content to back off here and bide their time. At least that's the message of our volume oscillators, which have been warning that the market was basically running on fumes for at least the last week.

We don't expect a great deal of giveback, but enough to turn the crowd bearish. Thursday's slide was enough to send our OEX and QQQ sentiment measures almost to the overly-bearish level, that point where about twice as much money is going into downside protection in the form of put options. This is a good sign for bulls, ironically, because the worst kind of selloffs will occur when the option players are scrambling into call options on dips -- that kind of action preceded a very nasty spill in 2000, for example. So, the signs of fear on the decline evident Thursday are contrariwise bullish for the larger trend. But, we have to let the profit-taking run its course and, hopefully, that will setup some good buys in the future.

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  # 10:10 PM

While the rest of the stock market was basically flat to down, the gold sector came to life one day after the 800-pound gorilla of the sector, Newmont Mining, broke through its downtrend resistance line:

While the breakout could potentially be partially retraced, we think this says that the whole sector is basically out of the woods after almost two years of corrective action:

Typically, the gold mining stocks will move about 6 weeks before the metal itself.

A note of caution, though: our internal volume measures have not confirmed this move and we would look upon it as a short term reaction to the US Dollar's decline. Thus, additional dollar strength -- which we do expect -- could set this sector back temporarily. When the big money starts buying gold mining shares, it should be reflected in our volume oscillators and we expect to get a strong buy signal. Until then, only buy as part of a long term accumulation program.

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posted by Bob Carver  # 10:02 PM

The market had a nice Monthly Buying Spree this month. The Spyders (SPY) on Tuesday moved to retest the highs put in at the close last Thursday:

Although we think an intermediate high is some way down the road, this market could be vulnerable to a correction in the very near future.

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posted by Bob Carver  # 9:49 PM

The stock market put in a mixed performance as the Dow continued lower and the NASDAQ moved to a higher high. Although the leadership shown by the NASDAQ is noteworthy, the 28% decline in volume from the 21st volume high suggests this market is too tired to move substantially higher. However, that doesn't necessarily say it will move substantially lower -- it simply indicates a period of stagnant price movement which is ideal for the sale of covered call options above the market and naked put options for stocks which are on your buy list below the market. For those so inclined, this allows income to be collected.

We note that August is one of the worst months of the year from a seasonal basis, rivaled only by September as one of the "bad" months for bullish investors. In fact, the month often sees fairly large intramonth declines. If that happens this month, we would expect the Dow to fall to the July low of 10,175. More than that would present the possibility of a deeper correction. The Dow closed Monday at 10,623, so that's really just a trading range movement, something quite ordinary and mundane, but which could turn investors bearish and setup a great buying opportunity in the weeks ahead.

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posted by Bob Carver  # 9:39 PM