Market Clues

The Federal Reserve's Open Market Committee hiked interest rates Thursday, but the market celebrated by rallying sharply higher. The reason was that it was clear that the committee had seen that their long series of inflation-fighting rises had finally done their job. Thus, the market reasoned, the market could get back to worrying about earnings -- and there, the picture is much brighter despite a slowing economy.

To some extent, end of quarter Window Dressing probably had something to do with the rally, but the early moves up in recent days by the energy and metals stocks were an early warning of the rally. Friday is the last day of the quarter and should bring in more buying, perhaps after a brief, sideways consolidation pattern, with the rally likely to move to higher prices before a larger consolidation next week.

One of the sectors which had been a big loser this year actually gave a signal on the rally that it would be moving higher for almost the entire next year. This very unloved (but former obsessively-loved) sector has a lot of ground lost to make up and could be a very big mover. Subscribers should follow the link below to our Subscriber's Notes page for more details.

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  # 11:58 PM

The market regained about half of its Tuesday losses Wednesday, but remains stuck in the trading range and obsessed with the Fed's statement to be released Thursday afternoon. While most expect the Fed to raise rates 25 basis points (¼%), the language in the statement will be dissected with fine-toothed combs to divine future rate changes.

Actually, when all is said and done, the Fed really should pause here. The economy is cooling off, inflation due to higher commodity prices is on the decline and the effect of prior hikes has yet to be fully reflected in the economy. In fact, recent signs of a weakening economy, such as a nearly-inverted yield curve and slumping repo balances, suggest that the prudent course for the Fed would be to pause to assess the risks.

But, of course, the Fed would be roundly criticized for being prudent, so with their hands tied to the rate hike lever, the Fed will hike rates once again. That's despite the fact that rate hikes actually exacerbate inflationary pressure until it becomes evident that the weight of higher interest rates is causing the economy to slump, at which point the Fed realizes it has gone too far and starts pumping liquidity into the economy at a furious pace. It's called a "vicious cycle."

Peter Eliades of http://www.stockmarketcycles.com/ has pointed out that, historically, whenever the Fed raises the discount rate to current levels, severe bear markets almost always occur in the stock market. And, many of those bear markets have been associated with recessions. Given the projected path of the yield curve, a recession beginning in the middle of 2007 appears virtually certain. With this rate hike, the yield curve is on track to fully invert over the next several months as the 10-year rate plunges below the 90-day T-Bill rate. If that inversion persists for a full 90 days, it signals a recession beginning one year later.

The sentiment readings are strange here. The OEX crowd is, as is typically the case, bearish, which is contrariwise bullish, of course. But, the QQQQ crowd is wildly bullish, which is contrariwise bearish. Does this mean the market could be stuck in a trading range for months? We shall see, but we expect extreme dips and rallies on Thursday after the Fed announcement. Then, we expect the market will frustrate the bulls and bears and close unchanged on the day.

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  # 11:57 PM

Although the Dow fell by 120 points Tuesday, the average stayed well within the parameters of the recent trading range. This is as expected since a key cycle we've been tracking isn't due to bottom quite yet. That cycle, in combination with longer term cycles which are bearish, has been urging caution on getting too bullish on the near term.

The Fed is helping keep both the bond and stock markets under pressure with their recent statements. We interpret the technical picture of a bottoming cycle as meaning that the Fed will be ending their measured rate hike policy soon. In fact, the one they are likely to do this week could be the last for a while. The markets would certainly take kindly to that kind of news.

The commodity markets are beginning to recover from the devastating selling of the last couple of months. The underlying world economy is in good shape and demand for commodities remains high, while demand for financials like stocks and bonds has yet to recover. That's why this is a bear market. But, even in bear markets, rallies do occur. That's something to look forward to very soon.

Perhaps as important as the bear market rally is that one of the hallmarks of the previous bull market is going to disappear soon and a new era in the stock market will replace it. This is a transition many on Wall Street have been predicting for years and have yet to see fulfilled. Of course, the transition is going to present opportunities at least as profitable as ones we've identified in the past bull market. But, if you're not on the right side of the risk equation, this transition could be very costly. Subscribers will find an explanation of what to look for in coming months by following 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  # 11:13 PM

Most of the blame for the recent weakness in world markets has been heaped on poor Ben Bernanke, the new head of the Federal Reserve Bank in Washington. But, the blame should have been placed on Bank of Japan Governor Toshihiko Fukui, who drained liquidity from the Japanese money supply, causing hedge funds who had borrowed at 0% interest rates in Japan and had invested that money around the world into liquidation of their massive and very profitable positions in commodities and stocks. Not a few smaller investors got caught under the heels of these elephants stampeding out of their positions.

It may be more than coincidence that Fukui is heading for the US and Canada this week to confer with central bankers. Many in Japan are calling on him to resign, not because of recent market turmoil, but due to indiscretions which preceded recent events by several years. No doubt, though, some of their enmity may have surfaced due to recent losses his countrymen have suffered on his recent decision to pull the plug on world bull markets.

The US stock market rallied, but on low volume, on Monday. This rally isn't going far though, as subscribers who follow the link below can plainly see on one of our charts. Still, the bear market is a healthy development, providing an intermission and additional entry points for investors who missed the recent bull market.

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  # 11:39 PM

Although they may be a bit premature, the jump in energy and metals sectors late last week signals that the trend is about to start turning up in the rest of the stock market. What is keeping the market at bay -- and the buyers sitting on the sidelines -- is the fear of the Fed continuing to raise rates and sending the economy into the ditch.

Those fears are quite justified since the Fed did exactly that on the last tightening cycle. Our measure of the economy shows it has basically lost all of its strength since the early part of the year and has slumped into the same ditch it was in following the hurricanes last year.

Now, since we get this data from the Federal Reserve itself, it's clear that the Fed officials know this very well and are probably a bit concerned that they might go too far. Although they are likely to raise rates 25 basis points (¼%) at this week's meeting -- after all, the markets have already priced in this hike and to do otherwise would disappoint them and raise fears of impending recession -- we suspect that they are going to drop a bone to the markets and hint that the steady hike regime may be coming to an end. But, since they don't want to spark excess bullishness, they are also likely to mention the possibility of high energy prices contributing to inflationary expectations, something they have already done in past announcements. Thus, the markets' reactions to the meeting announcement are likely to be short term volatile both up and down, but also likely to be positive longer term. The bond market should sense the end of the tightening cycle is coming and begin to lower long term rates. The stock market should also start to see buyers coming back in on the dips (we have already seen some of that happening, as a matter of fact).

We have some specific markets, sectors and timeframes which we think will be key to the bullish turn up that coming within the current bear market environment. We also have several methods which point to a specific timeframe for the end of the bear market which should be valuable for long term investors who are waiting patiently in cash. Subscribers should follow the link below for more specifics on stocks, bonds and some key opportunities in commodities as well.

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  # 1:16 AM

As we've mentioned before, the London FTSE-100 Index often leads the US stock market. We showed you a chart of the bowl-shaped polytrendline drawn along the reaction highs of the correction. Well, the bulls are obviously anxious to get the rally underway -- they pushed the index above that resistance on Thursday, showing they mean business. Of course, the bears responding by selling the market down to the line by the close, but this minor victory for the bulls is likely a preview of what's to come in July:

Option players in the US were of two minds: the OEX traders were extremely bearish. As bearish, in fact, as they usually are just before the market sets off on a big rally (these traders, as a group, are always wrong at a turn). However, the QQQQ traders are extremely bullish. So, there is a big difference of opinion, which is to be expected at this point.

One group which is always right was not indecisive on Thursday. This is the smart money and they leave tracks when they're up to something. They were definitely up to something on Thursday. Details can be found at our website linked 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  # 10:54 PM

The "day the sun stands still" didn't keep the stock markets from advancing, although the advances were in some cases pretty hesitant. The FTSE-100 Index in London closed higher, but remains below the resistance polytrendline it has formed on the correction:

As you can see, as long as the FTSE-100 remains below the resistance line, there's a pretty good chance that it represents a bottoming cycle which is turning up at the end of the month. And that could get the London market out of the hole it fell into in May.

In the US, the Dow broke out above its recent May-June resistance line and had an advance which put it back to the level it had in the early days of this month. Unfortunately, the internals weren't that great and the Dow's rally isn't as healthy as it might appear. Apparently, the option traders were not impressed, with the OEX crowd basically neutral and the QQQQ crowd outright bearish. Since the QQQQ crowd was actually right on the rally (they bought calls on Tuesday), we should respect their opinion, at least a bit.

Breadth was not bad: the Value Line, Russell 2000, and Midcap Indices all outperformed the blue chips. And, even our "lead dog" Semiconductor and NASDAQ-100 Indices did very well. Is this then a rehearsal for a bigger and better performance next month? Or, is this an oh-so-brief encore from the late bull market? We think the indicators are pretty clear on the answer, see 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  # 9:43 PM

In the aftermath of the Japanese central bankers torpedoing the stock and commodity bull run by removing the punch bowl before the party got into full swing, it is said that a number of hedge funds are seeing heavy redemption requests coming in from investors. Usually, hedge funds, unlike traditional mutual funds, don't honor redemption requests at the end of the day. Instead, they require the investor to wait until the end of the calendar quarter to receive their money back. Since we are coming to the end of a calendar quarter this month, and we have had a horrendous quarter for commodity investors, it stands to reason that a number of hedge fund investors are asking for their money back.

In any case, that's the rationalization a lot of stock investors are using to explain why the market is having a hard time making any kind of rally in stocks "stick" for very long. In fact, that explanation makes sense when you consider the pell-mell selling of good stocks, as well as bad, during the past two months. That's what we call "throwing the baby out with the bath water." In other words, hedge funds are selling their winners as well as their losers to raise cash. If that's the case, this redemption pressure should ease around the end of June, with a lot of good stocks very depressed due to artificial and very temporary selling pressure.

That will be just in time for the seaonal "Fourth of July" Rally. Of course, outside the US, the Fourth is not a holiday, but foreign stock markets tend to tag along with the US market taking the lead. This year it will be interesting to see just how much of a rally the market will have with the downward pressure of the 4-year cycle still to bottom. Perhaps the Japanese debacle has bled off much of the normal pressure to take profits after a strong bull market. If the rally is like some prior 4-year cycle years, it could be quite strong, perhaps recording new highs in the market. And, that would bode very well for 2007, as well as the second half of this year. There is a lot of sideline cash which could come back into the stock and bond markets to push prices higher. Remember, the market is perverse: higher prices create heightened demand for goods (stocks).

But, we still have eight more trading days of June to build a base for the rally that's coming.

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  # 10:38 PM

Stocks slid back down the greased pole Monday as Friday's Quad Witching options and futures expiration rally unwound very quickly after a brief spurt to the upside to catch the last buy stop orders which were poised above the market. Once the weak shorts were cleaned out, the Dow fell 150 points intraday, closing down 72 points from Friday's Quad Witching close. These are called "expiration games" and they can lead some players to nice short term profits, but do not disturb any longer term trends and should be ignored by investors as market "noise". Oh sure, the media will do their best to "explain away" the action by quoting news and events as the cause, but it's just a mechanical process like program buying and selling. Very predictable, just like the options expiration rally which usually tacks about 300-400 points onto the Dow. Nice for day-traders, but not so nice for longer term investors.

The QQQQ option traders stayed bullish during the slide, but were neutral at the close. But, the OEX option traders were extremely bearish all day, which argues that the market is coming into a significant low soon. Still, the trend has been and is still down and it's always your friend.

There are some bargains out there right down, both in the stock market and in the commodity markets. The damage the Japanese central bankers have done to world markets over the last few weeks is likely to be just a temporary blip in economic history -- an intermission which forces the old hedge fund players to cash in some of their chips and new players to add to positions at much more favorable pricing. With the air cleared of long term positions, the markets are gyrating with virtually no short term trend. That leaves the long term uptrend intact and many bargains for the latecomers to buy. And, we suspect that the US Federal Reserve officials have had some serious words (a "dressing down") to say to their Japanese comrades who contributed to the volatility. We suspect the Japanese will be on their best behavior now that their "superiors" in Washington are watching them. That kind of oversight is necessary when the children have been playing with the financial equivalent of matches.

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  # 11:19 PM

The stock bear market got a brief intermission last week as the option sellers pushed the market back up the hill just enough to cause the maximum pain to option buyers. By settling the indices where they did on Friday, option buyers lost the maximum amount of money on both puts and calls, something that happens quite frequently (yet, the buyers just keep coming back for more). This rally was a fakeout before the next leg down, so we recommend no overall stock market investment exposure at this time because although we do think a trading low is coming soon, it could be quite a while before an investment low can be bought. We do, however, maintain stock and commodity investment holdings in select securities which are in very long term bull trends and welcome these traumatic plunges which present wonderful buying opportunities.

The Japanese central bankers probably didn't know what they were doing when they pulled the rug out from under world markets. They drained $175 Billion from world markets in the last few weeks, forcing massive liquidation in virtually every market on the planet. Emerging markets around the world crashed back to earth, while more mature markets such as the US Dow Jones Industrials Average, the FTSE-100 Index in London and the Australian All-Ordinaries Index held within normal "garden-variety" correction levels. Big Ben Bernanke may have some words for his Japanese colleagues last week, telling them that crashing the planet into depression might be a big mistake, especially since he himself might get unfairly blamed for it. So, they are probably going to stop here before things go off a cliff. The damage is done and it's possible that a large financial trader may already be in big trouble which we will only hear about when it hits the crisis stage where it could ripple around the world like a massive string of dominoes, taking markets and investors with it.

Make no mistake about it, this is a 4-year cycle-driven bear market and a 20% decline would just be average for that kind of bear market. It could be a lot more (and has been in the past). The good news is that we think the low could come fairly soon. The even better news is that once the bear market is over, the bull market to follow is likely to be even stronger than the one which preceded it due to the emergence of approximately two billion new consumers of goods and services since the last recession ended. We're now seeing the true picture of what the 21st Century will look like as the globalization of the last few decades of the 20th Century come together to create a much more dynamic economy, albeit connected in a way which can present great challenges for investors.

With options expiration out of the way for this month, it's doubtful that there are many buyers left and stocks will move in the major trend direction (down) from here. We do think a tradeable countertrend rally is coming fairly soon, however. Details reserved for subscribers (see Subscriber's Notes 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  # 1:13 PM

The market has put together two big point-gainers in a row after the bear market had smacked it hard. Undoubtedly, this is short-covering buying and should burn itself out very quickly. Coincidentally (not!), it occured in the two days leading up to options expiration and just happened to send the QQQQ index options sailing right into their landing slots at Maximum Pain (39). And, the OEX index options also were right above their landing slot at Maximum Pain (570) as well. Almost every month the market makers in options are able to land their vehicles right on the price point which produces maximum pain (i.e., maximum losses) for buyers of both puts and calls. This month proved to be one of those months, despite one of the largest selloffs going into expiration week that we've seen in a long time.

While it would be nice to say that the big rally was caused by buyers jumping into stocks at bargain prices, the reality is that the bear market/correction has a lot longer to run than this. Anyone buying for the long haul is going to have to simply recognize that the gains are going to be given back in the next few months. Of course, that may be their strategy -- to buy the dips. That's a fine strategy if you're investing periodically for the very long haul. But, very few investors actually do invest for the long haul, unfortunately, and it won't be long before they are going to see losses and will be sellers again.

TrimTabs reported late Thursday that investors had pulled $6.4 Billion from stock funds in the last week. That comes on the heels of a net outflow of $1.87 Billion the week before. Clearly, the public is not a "buy the dips" crowd! They were even selling bond funds, for that matter. Apparently, they were intent on preserving wealth the old-fashioned way.

Terry Laundry, who developed the technical analysis technique known as T-Theory and built a large investment fortune using it, updated his blog on Thursday. He makes some interesting points, such as the fact that the Interest Rate T's, which tend to terminate at stock market bottoms, have been pressuring the stock market. The volume oscillators have been trying valiantly to indicate new uptrends in stock prices starting in recent weeks, only to see those nascent trends get hammered by the bear market. As soon as those Rate T's bottom, stocks are going to have a much easier time developing uptrends. He's estimating the first Rate-T will terminate in early August. The stock market could get a lift from that pressure easing, but the second Rate-T is scheduled to terminate in early November and may keep the stock market under the same kind of pressure we've been seeing lately. This forecast would allow for a brief Summer Rally (a Winter Rally in the Southern Hemisphere, presumably), but gains in that rally would likely be given back in the fourth quarter of the year.

We have a slightly different take on the termination of the first Interest Rate T, in fact, and have the stock market bottoming much earlier than August. Thus, we think that Summer Rally could get started quite a bit earlier than Terry does.

As we have said several times before, the picture is setting up to be a cousin to the market of 1994, which saw a sharp correction into a mid-year low, a rally that just retests the old highs, then a plunge into the last few months of the year. That last plunge landed a bottom that launched the largest bull market of the Twentieth Century from 1995-2000. Remember, the longer the base, the larger the rally that follows on its heels. Given a base that appears to be the entirety of the rest of 2006, investors are going to have to either take a very long term perspective, or trade this market. While some bulls were shocked by the ferocity of the recent decline, the bears must be absolutely shell-shocked by the ferocity of this latest bear market rally. Normally, the market will plunge faster than it rallies. In the present market, the rallies have been mirror images of the plunges. Never fear, though, the bears will have their turn again very shortly.

Note that if this were a bull market rally, it would have moved up gradually, backing and filling and not developing any short term excesses that could send the market down in a big hurry on profit-taking. It would not shoot out of a cannon like this one has. Over 300 points gained in 1½ trading days is definitely not a bull market rally -- it's a short-covering exercise for the bears as they are forced to take profits by becoming buyers of stocks. And, what goes up in a big hurry will often come down again in a big hurry as short term traders lock in profits by selling and the bears get even by selling the market at higher prices.

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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Subscriber Links: MyClues Home · Quarter-Hourly Chart Comments · Detailed Comments . . . .

posted by Bob Carver  # 10:44 PM

June 14th was Flag Day in the US and it brought the buyers out of their bunkers as the bear beat a retreat. Some gauges of strength showed that an underlying current of buying support does still exist. For instance, Dow Industrials' buyers were able to muster enough strength to send that average up as it retraced a hundred points of the decline. Other indices also gained back some lost ground, especially the "lead dog" indices (Semiconductors and NASDAQ-100), although the gains were subpar compared with historical rebounds. If the bulls can muster the strength to continue the rally on Thursday -- and they probably can, at least initially -- we will see just how important this much-anticipated bottom really was.

Our OEX option numbers were probably distorted by put holders cashing in their winnings. They showed four times as much money was transacted in puts than calls. Certainly, there were a lot of winners among the put buyers this month. Otherwise, that might be interpreted as a very bullish number.

Some say the rally was caused by short-covering and expect the bears to re-sell on the rally. Others say that the decline was overdone from the very start and the rally will send the market back to its old highs since the economy is in fine shape. Probably the weakness in the US Dollar is a key factor which stabilized stocks on Wednesday, so keep an eye on the currency on Thursday. A cheaper US Dollar, although it cheapens all things priced in dollars, does lift stock prices in this global market meltdown and makes US securities more attractive to foreigners.

Traders will be especially interested in seeing a couple of short term charts in tonight's Subscriber's Notes (see link below) as they show significant trendlines of resistance to watch in Thursday's trading. If the market rally gets turned back by those trendlines, new lows are likely, while breaking through those resistance lines would be very bullish short term.

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  # 11:20 PM

The correction continued on Tuesday as we expected it would. However, we are inching closer to a rebound rally. This next low is likely to be the end of the first big wave down, with another to come after the rebound.

The media has shifted from blaming fear of inflation for the market's correction to the Japanese central bank, which is reining in some of the money they printed to goose their economy out of depression a few years ago. Well, while there might some coincidental evidence that points that way, the point you should take to heart is that this correction is coming exactly when it should have come, so it really doesn't matter who triggered it. If it hadn't been the Japanese bank, it would have been something else. In any case, the sooner investors stop playing the blame game and start looking at all the "babies that are being thrown out with the bathwater", the sooner they can make more rational investment decisions.

One of the "babies" is Gold, which is in a bull market that has many years to run. When the Crash of 1987 occured in the stock market, how many investors said to themselves, "Wow! I can now buy stocks for $10 that were selling for nearly $100 just a few days ago. What a great bargain the market has provided for me to get aboard this bull market at cheap prices." Well, actually there were a few and they were all queued up at their local brokers' offices to Buy! Buy! Buy! But, we suspect that most of the so-called "sophisticated" investors were shell-shocked and spent the next year liquidating their portfolios as the market recovered.

For example, immediately after the Crash, you could have purchased Microsoft for 37¼, down from a high earlier in the year of 128¼. Despite Microsoft turning into a real loser for the last 7 years, your shares would still be worth over $3000 each today.

The same logic applies to Gold, which is undergoing a similiar correction in its multidecade bull market trend -- exactly analogous, in fact, to the stock market in 1987!

We have some definite ideas on just when the rebound rally in stocks will be starting. The Subscriber's Notes link below will take you there.

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  # 11:07 PM

If we are to believe the mainstream media, the stock market is in decline due to "fear of higher interest rates and inflation". Now, if that were true, would it not mean that investors would be buying Gold and selling bonds? After all, Gold is the ultimate hedge against inflation, while bonds lose value in a rising rate environment. Yet, what we have been seeing are falling Gold prices and rising bond prices (falling rates). It sounds like there might be a job opening or two for some fact-checkers!

In truth, what we are seeing in the stock market is a "correction" -- an innocuous word which means that if you are a long term investor in the stock market, you are losing money on paper (unless you safely parked your portfolio in cash). These "corrections" come along every so often as stock prices move up too fast -- well above trend growth in the economy, in fact -- and have to be "adjusted" down. Usually, the market will undergo a correction about three times a year. Historically, each correction will give back anywhere from 4-7% of stock value. Every year or so, a 10% correction will occur. And, every 4 years, almost like clockwork, we get a correction which averages about 20%.

Each time a correction occurs, the weaker holders of stocks will sell into the decline, forget to buy back when the uptrend resumes and then have to pay up after they realize their mistake. There's nothing wrong with selling to bank a profit, but not getting back on board is a big mistake because the stock market is the biggest driver of wealth creation in the economy.

In any case, we're in one of the larger corrections -- the 4-year variety -- and prices have lower to go. However, they don't usually give it all back in one fell swoop. There are rallies from time to time, usually not to new highs (but sometimes), followed by dips, usually to lower lows. Indeed, one of those rebound rallies is coming (see the link below for details) and it should be a good place for those who are inclined to sell to do so at lower risk than during the move up into May. In fact, the rally may very well surprise a few bears who have gotten very complacent in their attitude after only a month of being right on the market!

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  # 11:16 PM

Last week the market discounted two scenarios in the economy:

1. The Fed is undershooting by raising interest rates too slowly to stave off rising inflation, which will require much more tightening in the future.
2. The Fed is overshooting by raising interest rates too high for the economy, threatening to plunge the economy into recession.

The only thing that's clear is that the "market" is irrational. No, we didn't say it was "wrong" -- the market is always right. But, it can sometimes get pretty confused about the effect of the Fed on the economy.

Right now, the economy is in a short term slump after running at a higher-than-average rate for some time (due to various factors, such as liquidity, low tax rates, too much consumer debt, etc.) and this has caused asset prices (i.e., housing prices) to go too high for the Fed to stomach. So, they are targeting asset prices (according to former Fed Chief Greenspan's speeches).

What have they achieved? Exactly what they were looking for, in fact. House prices have leveled off and the bubble has been gradually deflated. Now, the only thing that's left is to declare victory. But, this Fed hasn't done that yet. They want to keep the thumbscrews on the economy a little while longer. And, that has the market worried.

Our opinion is that the Republican market machine is about to swing into action with the new Treasury Secretary taking the reins and steering the market toward this November's Congressional Elections. The Republicans are not going to give up Congress without a very big fight and a robust economy is exactly what they need right now. There may be a bit of backstage arm-wrestling between Treasury and Big Ben Bernanke going on right now. We suspect that Big Ben could get injured and declare victory over inflation sooner than many think. And, that would certainly be music to the market's ears!

Additional stock market commentary -- for subscribers, including trial subscribers -- 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  # 12:18 AM

Extreme volatility was the hallmark of stock markets around the world Thursday as they plunged sharply lower. The US market did so early on, but the sellers ran out of gas once again and the buyers brought the market screaming back up out of the midday depths to close virtually unchanged.

We recall a similar environment just four years ago. In fact, the market was plunging into the depths of the 4-year cycle low exactly four years ago. It was July and the market had been unable to mount a decent rally for months. When it opened sharply lower, despair was everywhere. But, it very quickly reversed course and rallied sharply higher on short-covering:

Thursday's action looked very similar:

We may very well be seeing the absolute price low occuring in the first half of the year. Now, wouldn't that surprise even the bulls, most of whom have apparently decided that they'll wait until October to buy? Could the train be leaving the station -- and leaving them behind?

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  # 11:24 PM

The stock market was volatile within the trading range on Wednesday. After alerting ETF Trader subscribers to the trading low on Tuesday, we analyzed the action on Wednesday morning and sent an email to those subscribers at 1:15pm EDT Wednesday with the S&P 500 June futures near 1269:

"... With resistance directly overhead, the rally is in danger of reversing this afternoon ... If the market does roll over as expected, it wouldn't take much to trigger fresh sell signals and that's what we expect will happen."

Indeed, the market did roll over, sell signals from our indicators were triggered and the market dropped precipitously. The June S&Ps dropped 15 points and the June Dow Industrials dropped 123 points from the time that email went out.

Still, even though the Dow was weak and did drop to a new low for the correction/bear market, most of the other stock indices did not. In fact, the low of the correction for most indices was made back in May and all the action since then has formed a trading range. Consolidation theory says the market is simply digesting its losses and will be continuing further south -- eventually. That won't preclude traders from making money on the short term action, however.

If you are a long term investor and do not trade the market, our advice stands to stay safe in money market funds -- even if we do get another trading rally, which we, in fact, expect to happen fairly shortly. This market has not taken all the prisoners it will eventually take.

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  # 11:16 PM

Up until Tuesday, we had two fairly equally likely future paths which the stock market could take. On Tuesday, that path became clear as the market confirmed that it would be following exactly one of those paths. In fact, one of the major patterns we have presented here on numerous occasions in the past is being retraced and that sets both price and time targets for us now. In addition, we have additional information which will help us navigate the ups and downs of the coming weeks as the market does its best to mimic a roller-coaster ride through the remainder of 2006.

The fact that it's a roller-coaster ride was never in doubt. The major twists and turns were unclear until today. If you're a long term investor and don't like to ride roller-coasters, the best place to be is in cash. But, if you want to reach for larger returns, you'll definitely want to read our Subscriber's Notes page today.

One thing we're going to do is to expand our coverage of the stock and bond futures markets in our ETF Trader service. At mid-session Tuesday, we sent out an intraday alert to ETF Trader subscribers which pinpointed when the downtrend would reverse with the goal that those traders would be able to look to take profits on short positions entered on our Trading Page signals Monday morning. Indeed, the market turned up within a half-hour of our projection and anyone who took short positions would have been able to take some nice short term gains to the bank. The market always falls faster than it rises (except in very long term bear markets) and we think short-side traders need more frequent updates.

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  # 11:00 PM

One of Wall Street's axioms is that the "trend is your friend." A corollary of that axiom is that "surprises are in the direction of the trend." The market sold off Monday, with the selling catalyzed by Fed Chief Bernanke's comments which painted a dreary picture of a weak economy and a strong inflationary threat. Stocks had put in decent gains off the May lows last week and were in the process of consolidating the rally when the sellers took control. Buyers were hard to find and stocks fell in a vacuum of a session. The Dow trimmed 200 points by the close.

All of our short term Trading Page indicators kicked into sell mode by late morning Monday (one had generated a sell signal as early as last Friday, confirmed by another right after the weak opening). Traders need to realize that when the underlying trend kicks in gear, the market can make a lot of progress in that direction. And, it certainly did on Monday.

The market is on edge with regard to Federal Reserve policy. Bernanke, recently appointed to the hot seat at the Fed after Alan Greenspan's retirement, is like the high school teacher who greets his class at the beginning of the school year with a stern demeanor with the hope of instilling discipline -- his inflation-fighting credentials are at stake here. The economy is coming off a very strong run, inflation is running well ahead of Fed targets and asset prices, such as home, bond and stock prices, are levitating the economy in a bubble-like fashion. Commodities are in long term bull markets, putting pressure on prices which are being passed on through the pipeline to end consumers. The Fed really needs to establish credibility at whatever cost. Thus, the stern headmaster struck a pose Monday and the markets wilted. If that means a bear market in stocks, so be it.

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  # 11:43 PM

The Employment Report did not disappoint the market Friday. With new jobs created far lower than expected, both the bond and stock markets rallied sharply higher. Also as expected, traders were eager to take those short term profits to the bank, sold their very profitable long positions and likely deserted their trading desks to get an early start on the weekend. This is a typical boreal summer pattern: take profits as early as possible on Friday morning in order to head to the beach by afternoon!

Initially, the rally sent OEX option traders heavily into call buying, but by the end of the session, the number of dollars spent on calls was barely more than that spent on puts, so we have not yet gotten an early wakeup call that the rally is nearing an end. We tend to see twice as much money going into OEX calls as puts about two trading days before a decline sets in.

The old leaders of the broad market continued to shine while the blue chips played catchup. This is the pattern we saw in the last bull market and points toward more gains ahead for traders. However, we must remind you that while we are short term bullish, this is a countertrend, or bear market, rally. Those kind of rallies can collapse quickly as the main trend reassets itself. Thus, only traders should be long the broad market at this time and investors should be patiently in specific investments and/or cash awaiting a great buying opportunity which is coming up, possibly even sooner than we had expected just a few months ago.

Scale Trading Update

Our scale trading had gone into hibernation mode in recent weeks as Soybeans were caught at the low end of their trading range. That ended on Friday as both Soybeans and Soybean Meal soared on reports of dry weather forecast for the plains. We sold our next-to-top contract in Soymeal and our bottomost Soybean contract (after expanding our price targets to $750 per contract). Our biggest moneymaker overall has been Soybeans, where we now have 10 straight winning trades (no losses) for a gross profit of $6,425 (less commissions) over the past 4½ months.

Goodies For the Bears

This week we devote some time to some prime short-selling candidates in the stock market. If you're a short-seller, you're going to love these picks because it looks like they are into their waterfall declining phase -- and it should last well into next year! Details can be found by following the Subscriber's Notes link just 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).

Is Your ISP Censoring Your Email? Internet email is dying, being choked to death by spam and overzealous service providers. If you're not getting these updates via email and you should be, switch to RSS, the spam-free alternative. For instructions, just visit: http://www.marketclues.net/rss.html.

Subscriber Links: MyClues Home · Quarter-Hourly Chart Comments · Detailed Comments . . . .

posted by Bob Carver  # 12:19 PM

It was just like old times Thursday in the stock market as the old leaders, the S&P 400 MidCaps, Russell 2000, NASDAQ-100 and Value Line charged back up the hill with the blue chips following along behind them. These were the leaders in the recent bull market and hopeful investors were jumping into them again on the belief in their ability to come back for an encore performance.

Certainly, the sentiment numbers continue to show that the crowd of option players just don't get it. For the twelfth trading day out of the last 16, OEX puts saw a larger share of money change hands than OEX calls. Now, that's real conviction since the OEX made its trading low over a week ago. This is the crowd you definitely want to fade because when they get their hearts centered on a direction, they are wrong with few historical exceptions. All of those exceptions occured in middle of big trends, so there's a chance they will be right this time. Still, most of the time they will be wrong. A continuing rise into options expiration Friday in two weeks' time would certainly be a surprise to that crowd.

Indeed, it could happen. After that quick decline we saw in May, a slow, halting and grinding advance may be in store. Friday could see a setback for the market as the Employment Report comes out an hour before the NYSE begins trading. Often, it will inject volatility into the market, most often the bond market, but sometimes the stock market as well. If the report is weaker than anticipated, causing investors to believe the Fed will pause in their tightening campaign, it could cause bond shorts to cover and lead to a quick rally that probably won't last too long. But, that rally could provide some support for the stock market.

On the other hand, a strong Employment Report would confirm fears that the Fed will continue to tighten and lead to a selloff in bonds and stocks. Since the Fed chief Bernanke announced they were looking at each "data point", the markets have been keyed up, looking for signs in the reports which might tip the Fed one way or the other. Friday should at least be a volatile day, which is good for traders.

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).

Is Your ISP Censoring Your Email? Internet email is dying, being choked to death by spam and overzealous service providers. If you're not getting these updates via email and you should be, switch to RSS, the spam-free alternative. For instructions, just visit: http://www.marketclues.net/rss.html.

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posted by Bob Carver  # 11:18 PM