Market Clues

The floodgates have been opened to stock investors now. The surge out of paper assets and into real assets has just begun. What it brings will be interesting -- and perhaps quite upsetting to those who are now solely invested in stocks and bonds.

If all this gives you the feeling that we've seen something similar before -- we have. It was in the 1970s when investors realized that stocks and bonds would give them a negative return over time. This was due to rising inflation pressure from soaring oil and other commodity prices, as well as an economy that was being sapped by an influx of available workers that outstripped the ability of it to supply them with jobs.

Fast forward to today and what do we have? Rising inflation that has yet to be accurately reported by the government, who now has a vested interest in lying about the true rate due to built-in cost of living adjustments (which were put in due to the out-of-control inflation of the 1970s). The influx of workers isn't a domestic phenomenon this time around. Those workers are coming from India, China and other places where a highly-educated workforce is willing to work for cents on the dollar.

For the last few years, we've seen prices of most commodities -- with the notable exception of the grain markets -- soar. Gold has soared 159% since 1999 and most of that rise has come in just the last five years. Copper has exploded by 441% since 1999 despite a Chinese attempt to smother the price rise by heavily shorting it, then having to buy back their shorts and take huge losses. Sugar has surged 280% and shows little signs of stopping despite the massive commercial short selling that has only driven those commercials to the brink of financial disaster by exceeding their credit lines and forcing them to take huge losses. And, of course, everyone is well aware of the surge in Crude Oil prices: from a low in 1990, that commodity has risen 370%.

On Friday, after years of resistance, the first Silver ETF shares started trading on the American Stock Exchange, joining the Gold, Oil and other commodity-based ETFs which have been made available to stock investors. Wall Street greeted the introduction with great skepticism, saying, "This is not the time to go long commodities." Of course, they were only protecting their vested interest in keeping their mutual fund customers from fleeing the coming disaster in the stock market. When the vast amounts of money parked in paper breaks its chains, where will it go? Straight into commodities -- real stuff.

When stocks crash, just remember that you were warned here.

Additional stock market commentary -- for subscribers only -- can be found here: Subscriber Notes (if you're reading this in plain text format or on the blog, 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  # 9:32 PM

A bear market is well underway already, but the big stocks are being levitated by the smart money to make them appear strong. All the while, they are selling and selling short into the rally. Who are they selling to? Latecomers who don't realize this is a new bear market. The smart money is bailing out of stocks.

There may be a very small window left to sell into, but it's not a good idea to buy into this new bear market. Yes, there are a few sectors where you should not sell and you should buy on dips. But, they are very few and this is not the time to buy.

Despite the bear trend in stocks, there are plenty of other opportunities around, such as big trading profits we took Thursday in the bond market. We have our eyes on a specific support line in a major commodity that we expect to soar even more than it did last year when it returned us our biggest winner of the year. Those details are, of course, reserved for subscribers using the link below:

Additional stock market commentary -- for subscribers only -- can be found here: Subscriber Notes (if you're reading this in plain text format or on the blog, 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  # 11:30 PM

While the generals of the Dow made a new high Wednesday, it was a different story for the broad market. Weakness is the order of the day for most stocks, while a small set of leading sectors continue to advance. The 4-year cycle has probably already peaked and will be exerting increasing downward pressure into its valley later this year.

But, there's a strong bull market out there if you only look. That bull market is in interest rates, which have broken out to the upside and are soaring higher. Since bond prices move opposite rates, that means it's a bear market in bonds. Consequently, as bullish as we are on interest rates, we are correspondingly quite bearish on bonds -- and the bears on bonds, who are actually bulls on interest rates, are making strong profits this week.

The pattern in rates points toward a trend rise into the June timeframe, with a pullback that's likely just a minor correction in the bull market, to be then followed by another leg up in the rise going into late in the year. Since rising interest rates attract investors who are looking for the next "sure thing", this bull market in rates is not a healthy development for the stock market. The 30-year Treasury Bond Rate bottomed at 4.151% in early June of last year and closed at 5.177% Wednesday, almost 11 months later. That's a long time for rates to be rising alongside a rising stock market. It points up the risk that's in stocks right now, as well as the opportunity in the interest rate bull market.

If we have seen the bottom in long term interest rates -- and we think we have -- the bull market has a long time to run. If we take the last high in rates in the early 'Eighties as the left side of a large Magic-T and the bottom in rates in 2003 (it was very slightly lower than last year's rate low) as the centerpost, the right side of the T extends out to the year 2025. The message from that indicator is that rates will rise on a trend basis for the next 19 years. It looks like the bond market bears (interest rate bulls) are going to have a long trend ride indeed!

Additional stock market commentary -- for subscribers only -- can be found here: Subscriber Notes (if you're reading this in plain text format or on the blog, 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  # 11:41 PM

It was about two weeks ago and the bears were warning of an imminent "crash" in stocks -- a "Hindenburg Omen" had appeared to the seers and delivered a message on clay tablets, presumably. But, it was just another case of misdirection. Readers here were well aware that the money flow indicator for the Dow Industrials showed a very positive pattern: money was flowing into the Dow stocks on dips, which means the smart money was betting that a rally would prove the bears wrong again.

Right on time with the due date for US tax filing, 17 April, the market bottomed and roared to yet another all-time high. Although we caution that no single indicator will always be right, this indicator certainly proved that paying attention to it can be very profitable as traders rode that rally to huge short term gains in the Dow Industrials.

The rally was quick and formed a peak just three days later, on the 20th. After a brief pullback, the Dow surged to yet another new high one day later. An interesting thing happened, though: the money flow line failed to make a new high. This was a case of bearish divergence and a clear warning that the smart money, which had been buying the dip, was bailing out with nice short term profits.

Ever since the 21st, the money flow indicator has been heading solidly south -- and the market has followed. What does that mean now? The answer is reserved for subscribers, of course.

Additional stock market commentary -- for subscribers only -- can be found here: Subscriber Notes (if you're reading this in plain text format or on the blog, 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  # 12:02 AM

The rally last week probably owed most of its strength to options writers recapturing put premium by levitating stock prices. This week should, by all rights, see weakness in the market as those same writers sell stock and drive prices lower. That's exactly what we saw just a hint of on Monday as the market closed mostly lower.

Whether the market has made its final high for this 4-year cycle is not the question now. It probably has, in fact, and the Dow could be headed lower, with, perhaps, a minor detour to a slightly higher high on the way.

One way to identify a market high is to count the number of irrational news stories on the public mind. A quick scan of the stories journalists are writing tells us that the level of incompetence in reporting has never been higher. Presumably, those stories reflect the public mind.

In a way, it's a repeat of the 2000 top as the pain of the 2000-2002 bear market has been completely forgotten in the heady days of a growing economy. And, undeniably, it's growing -- probably far too fast for a Fed eager to clamp a lid on a rising inflation rate that's mostly generated by the emergence of the Third World to affluence.

So, a return to the depths of despair of 2002, even if only a tiny reflection of that pain for the bulls, is a healthy cycle in the market. It's like a splash of cold water, saying to the market that it needs to wake up from the trance and realize just how vulnerable it is to those "fingers of instability" that have grown in the periphery. The advice to, "Sell in May and go away" should apply very well this year.

Additional stock market commentary -- for subscribers only -- can be found here: Subscriber Notes (if you're reading this in plain text format or on the blog, 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  # 11:50 PM

These days, with oil over $70 per barrel and gasoline north of $3 per gallon, you hear an amazing amount of nonsense from the public about the relationship between energy prices and various groups, such as the government, oil companies, OPEC countries and others, as if there were some kind of conspiracy afoot to bankrupt the average consumer of energy.

Forget it, that's just fodder for the journalists, who are probably as clueless as the public. The only explanation for high energy prices is the Law of Supply and Demand. That's because the energy market is just too big for any group to control prices. When demand exceeds supply, prices go up. And when demand falls short of supply, prices go down. It's as simple as that.

But, there's always a silver lining for those who find prices too high. Hedging. Yes, it's not something that's out of reach for the individual. If you are a Southwest Airlines and you know that you have a budget for jet fuel and that if prices go sky-high, your costs and profits will be impacted, what do you do? You hedge by buying futures.

The public can hedge about as easily as the big corporations. Those contracts are not just for the big guys, after all. One contract for 42,000 gallons of gasoline at $1.9542 per gallon (this is the wholesale price for January 2007 gasoline on the NYMEX exchange) is worth $82,076.40, but individuals can form investment clubs to pool their money to buy a contract that hedges against prices going higher. This will lock them in at the current market price, of course, but if that price fits in their budget, they haven't lost anything. And, they are protected from rises in price in the future. In fact, that January price is about 28¢ under the current wholesale price of gasoline for May delivery, so they are still ahead if prices don't decline by more than 28¢ per gallon over the next eight months!

But, the typical "man in the street" continues to whine and whinge about the big oil companies bankrupting the "little guy". If the little guy would wake up, think, and join forces with his fellow consumers, he might find that he doesn't have to be a victim. Living in ignorance is not a sin, but it can be costly in the long run.

For the truly simple way for individuals to hedge against the rising cost of oil itself, there's the "United States Oil Fund", ticker symbol USO, an ETF which has been trading for the past couple of weeks on the American Stock Exchange. The price represents the cost of a barrel of oil. That stock closed Friday at $72.81. As a sign of its popularity, it traded well over a million shares on Friday. Just think what a gasoline ETF would have done!

Additional stock market commentary -- for subscribers only -- can be found here: Subscriber Notes (if you're reading this in plain text format or on the blog, 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  # 1:10 AM

Corrections in bull markets can be quite spectacular and the plunges in Gold and, especially, Silver were normal reactions as short term traders took profits to the bank. The problem with Silver is that it has gotten far ahead of fundamentals and the plunge Thursday, which returned it to the same price level it had a week and a half ago, showed how thinly-traded that market can be when most of the players are on one side of the boat. Once the snowball gets rolling down the hill, it can pick up a lot of kinetic energy. Larry Williams has always said that Silver is a "public" market, meaning that trading there is dominated by the public speculators, rather than the professionals, and that makes it a dangerous playground as shakeouts can be quite severe.

Gold's rise and fall was more well-contained. The decline held well within the parameters of our polytrend support line. That support line should provide a good place to add to long positions with a tight stop loss price to control risk. It also should provide good entries in the ongoing bull trend in mining shares. Our "Gold" page ranks 48 gold mining stocks on a scale from 0-10 based upon accumulation and distribution patterns in those stocks. Not all gold stocks are created equal, and our rankings filter out the "fools' gold" from the real deal. Gold stocks should be a part of every portfolio. This year, the top-ranked stocks on our list have doubled in value from last year. So, we don't worry when the short term traders take profits -- we just get ready to load the truck.

Additional stock market commentary -- for subscribers only -- can be found here: Subscriber Notes (if you're reading this in plain text format or on the blog, 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  # 12:27 AM

The big turnaround rally of the first half of the week may have convinced a few short term players that the market is still strong, but don't you believe it for an instant. That's exactly what the rally was engineered to make you think. It's an illusion and one you will pay dearly for if you get suckered into believing for the intermediate term.

That doesn't say it isn't a great trading market for those who use exotic instruments like stop orders. You know, those things that investors aren't supposed to worry about because the stocks they own are going to the moon. Well, we can tell you most of them aren't and you'd better get ready to sell when the "Fat Lady" sings because this opera is well into its final act!

Admittedly, the short term picture is apparently strong, but we have to wonder just how much "reality" there is in the Wall Street Reality Show. It looks pretty much like most of those "reality" shows that are such a rage: scripted to look real. The strong hands had inventory to unload, of course, and they had to raise the bid to attract the buyers. Now, if your local Wal-Mart advertised "Always Higher Prices!", we doubt they would be in business for long. But, in WallStreet-Mart, such a reverse "sale" is just the ticket to attract the rubes to plunk down their cash to buy a piece of paper that gives them the right to try to sell to that greater fool that's bound to come along soon.

And, so it goes . . . .

Additional stock market commentary -- for subscribers only -- can be found here: Subscriber Notes (if you're reading this in plain text format or on the blog, 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  # 12:56 AM

Tuesday's rally wasn't much of a surprise since we said on Monday's night's Subscriber's Notes:

"The S&P's found support on an old resistance trendline Monday, which will probably provide a lever to get it back up into its topping price zone over the next several weeks and frustrate the bears who prematurely went short."

And, we have been showing a strong pattern of accumulation of Dow Industrials' shares, presumably by the strong hands, for the last few weeks -- plus, the cycle bottom being graphically portrayed by the polytrendline in the chart we posted at TradingTheCharts gave no doubt to the bulls of what was to come.

The Dow's 241-point rally, which started Monday afternoon as it neared the rising support trendline, gave no doubt that it would take no prisoners -- and it didn't. The bears were certainly out in force trying to sell short ahead of the rally. Apparently, their favorite pasttime is playing hopscotch on the freeway!

Almost everything went up Tuesday. Now, that doesn't happen very often. It certainly won't be that way every day. But, we can certainly enjoy it while it lasts!

Additional stock market commentary -- for subscribers only -- can be found here: Subscriber Notes (if you're reading this in plain text format or on the blog, 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  # 11:02 PM

The energy and gold markets proved that losing one's position in a bull market can be a poor decision as both broke out to the upside Monday. Even some bulls were caught on the short side of these fabulous bull markets as they turned an alchemist's dream of turning lead into gold on its head. The most important piece of investment advice from Reminiscenses of a Stock Operator is Old Turkey's sage advice to a young Jesse Livermore: "The big money is made by `the sitting--not the thinking.' Once a position is taken the hardest thing to do is to be patient and wait for the move to play out. The temptation is strong to take fast profits or cover your trade solely out of fear of losing the profit on a correction. This error has cost millions of speculators millions of dollars.... It is the big swing that makes the big money for you."

We're certainly enjoying the big swing to the upside in these sectors despite the fact that the bull market in stocks has entered a serious intermission that threatens to get much worse in the months ahead.

Additional stock market commentary -- for subscribers only -- can be found here: Subscriber Notes (if you're reading this in plain text format or on the blog, 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 Cultural Revolution may have come and gone, but in the financial markets, we may just be reliving the 'Sixties right now. Here's why:

On February 28, 1966, 10-year Treasury interest rates broke above 5%. Just this week, after spending years below that 5% level, 10-year Treasury rates broke above 5%. Back in 1966, very few would have believed that those 10-year Treasurys would be trading at 15.84% fifteen years later, but they did. In the time from 1966 to 1981, rates went on a tear to the upside, costing bond investors dearly. On paper, those investors didn't lose money unless they sold before maturity. But, adjusted for rapidly-rising inflation, they lost huge chunks of purchasing power as the value of their bonds dribbled steadily lower.

Of course, toward the end of the 'Seventies and in the early 'Eighties, sentiment had reversed course 180° -- bond investors had been beaten up so badly by inflation and rising rates that they were loathe to buy bonds. That's exactly when they should have been buying -- bonds soared in value until July 2003 when interest rates hit a low of 3.074%.

This weekend, we will be discussing how investors should be dealing with this revival of the 'Sixties and 'Seventies. History gives us some good lessons which investors should learn in order to avoid repeating the mistakes of the past.

Additional stock market commentary -- for subscribers only -- can be found here: Subscriber Notes (if you're reading this in plain text format or on the blog, 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  # 5:28 PM

Bonds fell to retest recent lows Wednesday, but the bigger news was that stocks resisted the decline. This suggests that traders are recognizing that both markets are bottoming and are trading buys right now.

Indeed, that was the message from our short term trading indicators. At the same time, OEX traders, who are usually wrong at trading turns, were pouring about twice as much money into puts as calls. This ratio tends to occur about two trading days before a turn to the upside in the trend.

Additional stock market commentary -- for subscribers only -- can be found here: Subscriber Notes (if you're reading this in plain text format or on the blog, 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  # 1:43 AM

The bond market has been pressuring stocks with its huge fall of the last few months. But, now, it appears that the bond market has found some support and is working its way back up the hill. Since recent weakness in stocks can be attributed to rising interest rates, this is a very bullish development for short term direction in the stock market.

The correction in stocks has been much deeper in some indices, including some of the former leaders, such as the Russell 2000. It does appear that we are seeing that transition from small stock leaders to large stocks that always happens in the middle of a bull market. It's a confusing time for investors as stocks which had done very well suddenly lose their ability to surge out of corrections and others start to lead. If that's the situation we're in, look for the broad market to be directionless for the next several months. It should be a frustrating time for long term investors, but traders are likely to find the new rythms more to their liking. For example, the big capitalization-weighted indices which the crowd likes to trade have underperformed severely in the last few years. Those stock indices are likely to be more rewarding as they oscillate in wider swings both up and down in the next several months. The VIX Index itself, which now trades as a derivative, should be one of the beneficiaries of the change in the market. Currently, it is running at an extremely low level -- imagine a bull market in volatility that's just beginning right now.

Although there's no strong trend to this market and not likely to be for some time to come, the strong sectors we've identified recently remain the ones to buy on dips because they are benefitting from massive bases of accumulation built up over the last few years. Right now, some of the strongest sectors are getting hit -- the typical "throw the baby out with the bathwater" syndrome that tends to occur at the end of corrections. Yes, it's time to get out the shopping list again!

Additional stock market commentary -- for subscribers only -- can be found here: Subscriber Notes (if you're reading this in plain text format or on the blog, 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  # 12:28 AM

The small stocks were weak, but the blue chips held on for gains Monday as the bears just couldn't keep the downdraft going. One reason might be that there are just too many bears for the market to oblige them. Our sentiment gauges have been swinging on the bearish side of neutral for several days, a sign that most of the bulls have been quite discouraged by events of the last few days, especially the rise in interest rates.

However, there are sectors that are still quite bullish. For example, in one of our favorite sectors, one we devote a page of charts to every day, the highest ranked stock on the page for the past couple of months -- 9.99 out of a theoretical maximum of 10.00 -- has soared 33% this month! In fact, it's up over 77% since the middle of February! Our computer ranks stocks based upon the degree of short, medium and long term accumulation that's present in the stock. This one has been under accumulation for a long time, has built a very long term base and recently broke out on a big increase in volume, and those are the characteristics our computer looks for in a strong stock (which is why it has been getting consistently high ratings even before the breakout). By looking at the leaders -- the strong sectors -- and the strong stocks within those sectors, you can grow your long term investment portfolio no matter what the rest of the market is doing.

Additional stock market commentary -- for subscribers only -- can be found here: Subscriber Notes (if you're reading this in plain text format or on the blog, 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  # 1:33 AM

The hurricane season this year is expected to be much worse than normal by the experts. But, a different kind of hurricane is striking the stock bull market and selling squalls are appearing, warning of the coming storms.

We're referring to the rapidly-collapsing bond market, where interest rates, which had appeared immune to Fed rate hikes up until the last few months, are soaring in a "bull market". When rates soar, bond prices drop and that causes the relative yield advantage of stocks over bonds to narrow. It also increases the cost of doing business and that reduces earnings. Thus, the result is that when interest rates trend higher, an extra "drag" on stock prices is introduced. When the drag becomes too large, selloffs result. Friday was one of those occasions. Bonds initially rallied on the Employment Report, but short sellers hammered that market, sending interest rates soaring and stocks came tumbling after, just as we warned you would happen.

The recent rise in interest rates is not just a drag, anymore, it's a serious storm and harbinger of future storms that are likely to slow and reverse the progress of the stock bull market. We have posted a long term chart of the interest rate on 10-year Treasury bonds on a discussion board at TradingtheCharts.com
( http://tradingthecharts.com/phpBB/viewtopic.php?p=2617#2617 ). As you can see from the chart, we have a strong uptrend in rates in progress which is going to present strong headwinds -- accompanied by occasional gusts of hurricane force -- to the stock market.

Now, realize that this doesn't mean that stocks will necessarily go down -- they will at times. But, it does mean that a market with a permanent upward trend like stocks will have its forward progress increasingly slowed by the rise in rates. The stock bull market which started in 2003 had the wind at its back. A combination of rapidly rising earnings from strong monetary and fiscal stimulus combined with 60-year cycle lows in interest rates jumpstarted the bull market. But, with rates now coming off that cycle low in a strong fashion, stocks will advance based on earnings more than anything else. Thus, to make money in the market on the long term will depend upon being in growing sectors and stocks. That's where the tools we have developed for investors come in, of course. Fortunately, with the advent of sector-specific funds to invest in, that job is far easier than it during the last time interest rates embarked on a strong uptrend.

The last time long term interest rates were at this level on the way up was in 1966 -- 40 years ago. That year, in fact, marked a ceiling for the Dow Industrials that held the average going sideways for the next sixteen years -- until the 1982 low at Dow 777 triggered the beginning of the biggest stock bull market in history. That period encompassed rising inflation and energy prices, plus a major foreign war that was extremely unpopular domestically. Sound familiar? It should -- it's exactly what we have today. While history never repeats exactly, it certainly does a good job of rhyming!

The surprise this week is that a sector we've been watching closely has broken out to the upside, suggesting that it should be bought on dips, of which we should have a number of opportunities to do so over the next 4-8 months. This sector is still down sharply from where it was in 2000, but its recovery could mean hundreds of percentage points on the upside are entirely possible.

Additional stock market commentary -- for subscribers only -- can be found here: Subscriber Notes (if you're reading this in plain text format or on the blog, 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  # 2:22 AM

The stock market is struggling to keep its head above water while the bond market continues attempting to pull it under. On Thursday, the bond market dropped again and stocks came tumbling after. But, later on, bonds found support and chopped sideways into the close, allowing stocks to recover most or all of their losses.

Most of the leading indices registered all-time new highs on Thursday, both on an intraday and closing basis. But, once again, market internals are horrid. Breadth was negative for both the NYSE and the NASDAQ. Still, the fact that the broad market was once again able to set new record highs says we're not at a short selling opportunity yet. If the bond market could ever show even a "dead cat" bounce, stocks are likely to do pretty well.

A data challenge will come Friday morning in the form of the March Employment Report. While the headline numbers are purely fictional in terms of new jobs, unemployment rate, etc., the market will lap them up and trade on them (as they say in computer circles, "Garbage In, Garbage Out"). According to the current Treasury Secretary, John Snow, we should be looking forward to a strong Employment Report (his basis for such a prediction is uncertain -- most observers suggest his role is more of a cheerleader). If the bond market has taken his prediction to heart and the numbers turn out to be weaker than they expect, we could finally get that countertrend bond rally we've been looking for. And, that would certainly help the stock market rally as well.

On the other hand, a very strong Employment Report could forestall such a rebound in bonds. At the present time, bonds are extremely oversold, so it will be quite instructive to watch the reaction of bonds to the report. If the report shows a strong economy and bonds don't sell off and turn around and rally, it indicates at least a short term trend change in the bond market to the upside. And, that would help light the fire under the stock market. Often it's better to simply wait until the news comes and gauge the reaction of the market to the news before taking a position. We've seen the bond market rally in the face of extremely bad news before (to the bond market, a strong economy is very bad news indeed).

The Employment Report comes out at 8:30 am EDT (12:30 Universal Time). We won't have long to wait to see just how the bond market reacts to it.

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posted by Bob Carver  # 12:38 AM

Bonds have had their worst decline in many years in recent months. Despite that drop, stocks have been blithely rallying, although the signs of internal weakness are abundant. Just a minor pause in the bond downtrend was enough for the stock market to make new all-time highs in the broad market on Wednesday.

But, this is the calm before the storm in the stock market. Stocks are rising while the weak hands buy to catch up with a stock bull market that has more than doubled. At the same time the strong hands are selling massively into the rally. In fact, they welcome this relief from the bond market because it allows them to pump out more shares to the latecomers. They are patient and will be buying when the pain of the coming correction disgorges shares from the weak hands.

Anyone invested in the stock market right now has to realize that the bull market is living on borrowed time. Keep stop loss price points in place. Vow to never give back more than a small percentage of your bull market gains. Or, simply sit in money market funds and Treasury bills until the correction is near its end. "Sell to the sleeping point" is always great advice when a bull market has run its course. And, this one is very close to having run its course.

There are still a very few pockets of real strength, though. On the whole, many of the sectors which are rising in price are showing bearish divergence. These will be the sectors which fall hard in the second half.

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posted by Bob Carver  # 12:43 AM

Our dollar-weighted option call and put volumes are swinging wildly from bullish to bearish and back again as the market apparently is having a hard time deciding on direction.

For instance, on Friday, the last day of the First Quarter, we got more than twice as many dollars going into calls as puts, which normally will be a projection of a top 2-3 days hence. But, we have to discount "special" days like last Friday because it was the last day of the quarter and thus was affected by special factors.

On Monday, sentiment swung close to overly-bearish as the OEX crowd heavily preferred puts (these are contrary indicators, which means that the majority is usually wrong). Of course, we got a rally that mostly stuck on Tuesday.

Still, the option traders remain bearish. The OEX ratio showed the rally had no positive effect on their psyche whatsoever. And, QQQQ traders were absolutely bearish as they paid 5 times as much money for puts on Tuesday.

That kind of bearish sentiment probably gives the market some legs. As those traders are continuing to try to sell "the top", they provide buying support when the market rallies as their buy stop loss orders kick in.

Yes, there are a lot of indicators which are flashing warning signals right now. But, tops take a while to build and this one is no exception.

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posted by Bob Carver  # 12:39 AM

Monday's vigorous stock market rally could not hold its gains and gave up all or most of them. by the close. The Russell 2000, which had been relatively strong going into Monday, closed with an outright loss. Additions to the index at the end of the first quarter may have provided an opportunity for short term traders to buy the new members before they officially entered the index, then sell them after they were in for the first time on Monday, so this one-day reversal could be just a temporary blip.

On the other hand, the NASDAQ also showed weakness that can't be attributed to index changes. Breadth on the NASDAQ was horrid, with about twice as many stocks ending down as those ending up for the day. Breadth was more evenly matched on the NYSE, but even there the declining stocks edged out advancers.

While we focus on the US market, we also like to take a look at other world markets. Now that the planet is basically a global market, what happens in one stock market has important impacts on other markets. The German DAX continued to advance Monday, but that high came on an ideal Time Ratio High date, so that market needs to be watched carefully. The Dutch AEX had been strong until just recently and may be consolidating sideways, but it looks spent. The very important London market (FTSE-100) is also consolidating at recent highs. A long range Magic-T expires in May and could help maintain the upward trend. Of course, as we move toward the expiration dates of Magic-Ts, uptrends tend to get increasingly weaker, dips larger and rallies harder to make progress.

A couple of markets are noteworthy for their continuing strength: Australia and Japan. Japan broke out of a consolidation trading range to the upside last week. The Australian market continues to break new high records every day as its long term bull trend (expected to continue into 2018) has even exceeded our wildly bullish expectations in recent weeks.

If the US market were about to break down as many of the more vocal bears are again calling for, we should see similar breakdowns occuring all over the world. The fact that we do not see that tells us that the sun still shines on the world stock markets. But, that doesn't mean that risks are not rising rapidly and that prudent investors will take Bernard Baruch's advice and let the other guys take the top 10% and the bottom 10% as long as they get to keep the middle 80%.

Additional stock market commentary -- for subscribers only -- can be found here: Subscriber Notes (if you're reading this in plain text format or on the blog, 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  # 12:56 AM

Friday brought movement in the grain markets for traders. We finished selling our inventory of Corn right at top tick Friday morning on a gap opening. That gap up covered all of our commission costs for all of our scale trades for at least the last month as we were able to achieve an extra bonus profit of 4 points on our sell limit order. That's why we've said slippage in scale trading is always in favor of the scale trader, rather than the trend trader. The scale trader is always trading against the trend and that means that slippage is always in the scale trader's favor. The small profits per trade are compensated for by the fact that it's extremely rare for any individual trade to be unprofitable and the outstanding record of gains are made on the sheer volume of trades over time. When you consider the gap openings, commissions can generally be completely ignored because the market probably "paid" you to take all those trades over the long haul.

Bob Wiest wrote the book -- literally -- on scale trading; he can be contacted for a copy of You Can't Lose Trading Commodities at this phone number: 1-800-960-9492; or, email him at: Bob AT AmericanScaleTrader DOT com.

The gap opening in Corn was caused by these statements in the USDA Report released two hours before the pit grain sessions started trading Friday morning:

"Corn growers intend to plant 78.0 million acres of corn for all purposes in 2006, down 5 percent from 2005 and 4 percent below 2004. If realized, this will be the lowest corn acreage since 2001 when 75.7 million acres were planted for all purposes. Expected acreage is down from last year in most States as producers intend to switch to other less input intensive crops due to high fertilizer and fuel costs. Dry conditions also contributed to lower corn planting intentions in the southern Great Plains."

Note that these are "planting intentions" and could change between now and planting time. For instance, if Corn prices continue to move higher, some farmers may decide to plant more Corn and less Soybeans. Soybean prices fell on the report, with this section being the cause:

"Soybean producers intend to plant 76.9 million acres in 2006, up 7 percent from last year. If realized, this will be the largest planted area on record. Acreage increases are expected in all growing areas, except in the central and southern Atlantic Coast States and the southern Great Plains. The largest acreage increase is in North Dakota, where record high soybean yields last year and high input costs have some farmers shifting acreage from other crops to soybeans. Large increases in soybean acreage are also expected across the Corn Belt, including 600,000 more acres in Illinois and 500,000 more acres in Indiana."

Other commodities gave back a bit of their prior gains. Gold and Silver saw profit-taking on the huge gains made up until Friday's session. These are bull markets and smart investors should look on pullbacks as opportunities to put new cash to work, just as they would a bull market in stocks and bonds.

Speaking of the latter two, bonds had an absolutely terrible week. The June US Treasury Bond contract fell $1,882 as bond prices plummeted as the right side of the rising interest rate Magic-T concluded on Thursday. If that "T" is accurate, the bond market should find some temporary relief from rising rates. However, the overall trend is for higher rates for some time to come, a trend which makes the bond market great for scale trading. This week, we will be introducing a Scale Trading Plan for the bond market.

The stock market continues to show strength going into what is expected to be its final peak of the year. The 20-week trading cycle bottomed on the 8th of March, and that makes Monday the midpoint of the 4th week of the cycle. That cycle tends to show its maximum upside potential in the first 10-week portion, so as we get close to the midpoint of the 10-week cycle, we should be looking for the market to start getting larger pullbacks and shorter rally phases. After all, the 4-year cycle, which last bottomed in October 2002, is due to make its appearance in the second half of this year -- we're now 42 months into a nominal 48-month cycle -- should be peaking out pretty soon. Thus, it will not pay to get too bullish on stocks. The 4-year cycle has produced a 20% "correction" 85% of the time, so any long investment (long term) positions in the broad market (not necessarily individual sectors which are in strong bull markets) should be liquidated or hedged if you're not a stock trader. If you are a trader, broad market holdings should be ready to be sold on signs that the peak has already occured. Certainly, there are individual stocks and sectors which should be retained for the long term uptrend. Losing one's position in a bull market makes jumping back in difficult, especially if the correction is not as strong as a "normal" one -- which may very well occur this year given the position of the long term bullish Magic-T which points up into 2007.

Additional stock market commentary -- for subscribers only -- can be found here: Subscriber Notes (if you're reading this in plain text format or on the blog, 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  # 1:31 AM