Market Clues

The market just ran out of gas on a hot summer's day across the Northern Hemisphere. While the market Down Under put in an small advance on Monday, it was little more than a knee-jerk reaction to the up day on Friday on Wall Street. The trading range continues there on Tuesday morning.

In Europe and North America, the order of the day was a dreary march sideways as the major indices were bound in a narrow range all day. Given the fact that the last trading day of the month is an up day 70% of the time, the poor performance of the market can only be attributed to the fact that we are in an intermission in the bear market -- that period of time between big legs to the downside.

Sentiment shifted enormously, though, to the bullish case. Short term traders expect the rally to continue. They may be right, but only on the very, very short term. That's why they call it a Slope of Hope. It's the flip side of the Wall of Worry which bull markets climb. It's a slippery slope, 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  # 9:14 PM

The rally last week which followed our scheduled cycle low impressed quite a few folks. Unfortunately, bear market rallies tend to do that. It's why bear markets fall on a "Slope of Hope" (the obverse of bull markets, which rise on a "Wall of Worry"). It's important to distinguish between a true bull market rise and a bear market rally because the latter often leads to tears.

Kickoff rallies in bull markets exhibit some signs which distinguish them from bear market rallies. Unfortunately, last week's spirited rise exhibited few of those signs. Thus, while the market may have put in its low of the year already as we anticipated would likely be the case, we're not out of the woods just yet. When will it be time to buy for investment purposes? We have a number of signs to look for in this weekend's comments for subscribers, 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  # 3:48 AM

The market bobbed up and down on Thursday, but most stocks closed very close to their lows of the day. Advancers trailed declining issues substantially, a sign that the market is still in need of critical care. After the Bank of Japan truck ran over it, it has been doing its best to stay alive and has managed to put in a few days of rally. In fact, in some indices, such as the New York Stock Exchange Composite Index, we've actually seen a bullish pattern emerge of higher highs and higher lows.

But, that's more the exception than the rule. One of the worst-hit sectors has been tech and there we finally saw a bit of light emerging from the tunnel Thursday as the Semiconductors actually were able to stage a rally and close up almost +1½% when compared to the benchmark S&P 500 Index. That is possibly a very early warning sign to the bears that their days of being able to hammer the market lower may be getting few and far between in the future. A confirmation that a turn is coming will be given when the Relative Strength of the NASDAQ-100 Index is able to hold its head above the waterline and that hasn't happened quite yet. Another hopeful sign would be when the broad market is able to outperform the blue chips -- again, that has not happened yet.

The European stock markets have been outperforming the US and Asian markets recently. That may also be a bullish sign as well. However, rising interest rates may very well be the ultimate Sword of Damocles for stock markets around the world, so we certainly wouldn't want to suggest that the bear market is in any shape or form ending. In fact, if the analog year of 1994 gives us any clues to just how long the bear will last, we probably have more than six months until it's over. Of course, bear markets tend to have apparently strong rallies as they build a "Slope of Hope" for the unwary investor to jump onto and we wouldn't rule out one of those coming up in the near future. So, while the rally, once it does get started, may not last, it should provide traders with excellent returns over the intermediate 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  # 11:45 PM

The prospect of a third day up was just too much for stocks as the market faded badly toward the close. Most indices closed lower, although the majority of stocks actually advanced.

One of the more amazing things about this market is its ability to rise in the face of a Mideast war going very poorly and threatening to spread. After starting in the victim role and with world opinion sympathizing with their plight, the Israelis have already turned public opinion mostly against their cause and are likely going to lose the war in some fashion. This apparent victory for Hizbolla comes as a complete surprise and suggests the risk of an Arab oil embargo cannot be dismissed as lightly as it could have been just last week. The effect of such an embargo would be immediate and could send the markets into tailspins. Thus, the near term risk is far higher than it has been.

On the bright side, even if the Israelis fail to achieve their goals, Arab oil is still likely to flow freely to the West. If a settlement can be worked out, the markets would certainly celebrate, so the risks are about equally distributed between the bulls and the bears right now. Near term, the bears have the ball. If they can't drive to new lows, they will have lost their golden opportunity.

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  # 10:17 PM

The market stutter-stepped Tuesday, but by the end of the day was able to muster enough strength to make it back to near the top of the trading range which has bound it since the middle of May. Although it was nice to see the market follow-through after a rally day with another rally, the internals still leave a lot to be desired and further base-building is likely.

One missing ingredient in Tuesday afternoon's bounce was the NASDAQ-100 Index, which continues to lag behind the blue chips. When our "lead dog" lags, it's best not to get too excited about the rally. This is a strong sign that the stock market is basically still mired in a trading range with no overall direction to please either bulls or bears.

The bond market slumped on Tuesday as signs of rebounding consumer confidence dashed bulls' ideas that a recession was imminent. Although we think the chances are fairly high there will be a recession, it's not likely to start before July 2007 and that's too long to hold the attention of bond traders, so they sold bonds Tuesday.

We did read with interest the report from Van Hoisington and Dr. Lacy Hunt of Hoisington Investment Management Company in Austin which John Mauldin distributed in his weekly Outside the Box letter. From their perspective, the odds appear stacked in favor of a recession in light of the large number of indicators which are historically accurate at forecasting such events. Certainly, one would not want to be buying stocks in the face of a recession. The last recession saw virtually every stock get slaughtered and it's likely the next recession will be far worse than the tech-heavy affair of the early 'Naughties. And, of course, the bond market will benefit from the falling interest rates that will come about due to the next recession. Still, the article points out factors which will delay the onset of the recession and it's too early to be switching from stocks to bonds.

The best indicator of a future recession, the difference in yield between the 10-year Treasury Note and the 90-day Treasury Bill, continues lower in negative territory (i.e., an "inverted" relationship where short term yields are higher than long term) it entered on July 18th. It has been inverted for more than week now and shows no signs of recovery. But, the signal of a recession will be given officially only if the indicator stays inverted to mid-October and even then it will be forecasting a recession starting next July -- nine months later.

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  # 11:01 PM

World markets were injured by the Bank of Japan this year. Starting in March, the BOJ started withdrawing liquidity from the system. This liquidity had helped pump almost all markets up after the deflationary scare of the early 'Naughties. Excess cash had been used to fund "Yen carry trades" where money was borrowed in Japanese Yen, converted to other currencies and invested. The interest rate on borrowed Yen was zero, so any positive return in other currencies was likely to produce fabulous profits as long as the Yen didn't appreciate. And, the Yen did not appreciate because the conversion of Yen to other currencies meant that Yen were sold to buy those other currencies, keeping the Yen under downward pressure.

Although the markets had plenty of advance warning that the BOJ would be withdrawing these funds in March 2006, it was business as usual around the world into May. Of course, we detected that the smart money was selling heavily into the rally and warned subscribers that it was time to move into cash or hedge investments for the storm that was inevitable. When the massive storm of selling is taking place into a rally, the end result usually ends up exactly like this one ended up -- a panic decline to get out.

Since the panic, the BOJ has retrenched somewhat and that has helped ease the pain the markets are feeling. And, the stock markets are bouncing back and forth from the top of the trading range to the bottom and back up again in a dizzying spectacle that has both volatility and lack of trend direction. However, the BOJ has not reversed their policy and there isn't much hope the markets will go back to the carefree days of yesteryear. The markets have to get used to a much more "normal" kind of environment without that excess liquidity pumping up all manner of investments. It will take time for the markets to adjust. The interesting thing to investors is to recognize when the markets have adjusted and are ready to start moving up again. That's where the aspect of time comes into play.

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  # 12:45 AM

After all the midweek fireworks from the option short sellers levitating the market in order to repurchase their options at prices as close to zero as they could get, the market found few buyers were interested in further levitation and did what comes naturally: fall on lack of interest in buying. Sellers were not that keen, either, perhaps due to the fact that many were on vacation at this time of year?

Since the mid-May correction began, the blue chip S&P 500 Index has fallen just 8%, hardly a historic drop. But, the drumbeat of the bears has reached decibel levels last heard in October, just before a rally of 13½%. Could it be that the bears are counting their chickens before they're hatched? Those OEX put buyers are back in force, pouring over twices as much money into puts as calls. Perhaps they're looking to get even with the market makers this month.

Of course, the devastation in the NASDAQ-100 Index has been far worse. The drop there has been a much more wrenching 17.86%, which completely wipes out all gains in that market for the last 15 months. Recovery there may be much more difficult, but when it comes, it could be much larger, percentage-wise, than the S&P 500 Index. If it doesn't outperform the blue chips, however, it could mean that the market is looking for an immediate recession, rather than one a year out.

The Yield Curve continues to move deeper into inverted territory. If it stays inverted (i.e., short term yields higher than the 10-year Treasury) until mid-October, it will be a strong indication of a recession beginning in July 2007. A lot can change, of course. For one thing, the White House may call in some markers at the Fed and get them to ease monetary policy to get the economy (and the market) going up again. With the mid-term elections coming in early November, that possibility cannot be discounted even by the most ardent bears.

As for the near term outlook, we took profits in one market Friday and will be looking to take profits in another this coming week. Subscribers, follow the Notes link below for details and analysis of the upcoming week. 3-month free trials for non-subscribers are also available using the PayPal button above.

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  # 10:37 PM

The question we posed yesterday, whether or not the quick rally to wring all of the time premium out of options was over, was quickly answered in the affirmative Thursday morning as the market keeled over and plunged back toward the lows, especially in the broad market. Although the Dow gave back less than a hundred points, the broad market did much worse. For example, the Russell 2000 Index gained 19.85 points in Wednesday's options-related rally, then gave back 17.83 of those points in Thursday's plunge. The Dow Transportation Average gave back all of Wednesday's rally and then some as the money gushed out of economically-sensitive stocks and into safe-havens like the Dow Utilities.

At the same time, we've managed to garner some nice trading profits on both the short and long side of stocks and the long side of bonds. Those two markets have been moving mostly opposite each other and that's definitely a sign of a recession on the way. The best indicator is the Yield Curve, which has fully inverted once again and is moving even further into negative territory. For those who would like to read a description of why this indicator is the best pointer to a coming recession, John Mauldin wrote an excellent description of it late last year. Here is a link to a copy of it: The Yield Curve http://www.321gold.com/editorials/mauldin/mauldin123105.html

Is there a bottom out there, somewhere, anywhere? The question is a great one and we answer it in tonight's Subscriber Notes for subscribers only (including trial subscribers). The link is 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  # 10:02 PM

Pamplona, Spain, has the Running of the Bulls, an annual event that occurs as part of the Fiesta of San Fermin. Wall Street, though, has the Running of the Option Speculators, a monthly event. Wednesday was the day the option writers set the bulls loose on the put buyers.

The OEX Index is very popular with option speculators, especially so for put buyers. For a modest entry fee, speculators can win big if the market moves down substantially. And, this month, that was the case -- until Wednesday. Put buyers had big, fat premiums on their mostly in-the-money puts. The problem is that the creators of those puts -- the OEX option writers, or short sellers, which is actually what they do -- were looking at paying out quite a bit of cash to the put buyers on Saturday. Unless, that is, those puts could be made to expire worthless. And, thus, the monthly expiration game of rallying the market 300-400 Dow points to make those puts worthless came about. It has become an almost monthly tradition, also called "Maximum Pain" for the effect it has on option buyers.

In any case, the exercise was performed on Wednesday as the market retraced much of the recent trading range from bottom to near the top. In fact, the OEX landed almost squarely on a price which makes most puts, as well as most calls, virtually worthless. Don't you love tradition?

There is a critical trendline -- a real "Line in the Sand" -- which the market must test to determine whether the rally was the start of something bigger, or whether the bulls were just out for a brief run at those option speculators.

If this was just a brief, options-related rally, we should see the market stall soon and start pulling back again. But, if we see some real strength -- including strength in the NASDAQ-100 and the Semiconductors -- we will have assurance that the outlook is brightening for the stock market and the economy. At this point, that may be wishful thinking, but we're willing to be convinced by market action.

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  # 12:37 AM

The stock market bobbed up and down all day Tuesday, but the bell rang at high tide and most stock indices showed very modest gains. After the close, disappointing earnings from tech companies sent the NASDAQ futures gyrating in a wide range, although the blue chips held onto most of their day gains. The news wasn't all bad, but the implications from the earnings reports indicated a marked slowing in business has arrived for tech companies. There is every reason to think that a recession is on its way in the US economy. The only unknown now is exactly when it starts.

Money has been shifting to the safer sectors, such as Utilities, for some time now. The Dow Jones Utility Average is, in fact, up almost 10% over the last three months and appears poised to move to a new all-time high if economic news points to an impending recession.

The best predictor of a coming recession -- the "Yield Curve" -- is the relationship between the 10-year US Treasury Note Rate and the yield of the 90-day US Treasury bill. When the 10-year rate goes below the 90-day yield, it's called an inversion. An inversion which lasts for a full quarter is a sign that the economy will enter a recession within the next nine months. So far, we've only had a brief inversion and the condition cleared very soon, so no signal -- yet. But, the 90-day yield reached 5.103% on Tuesday, creeping ever closer to the 10-year rate, which was 5.132% at the close. If the yield curve continues falling, it should dip under zero very shortly. If it stays there for three months, you can count on a recession about one year from today.

Ben Bernanke, the new Fed Head who replaced Alan Greenspan recently, certainly knows the economy is in trouble. But, it appears that the Fed is deliberately pushing the economy into recession to quench the flames of inflation. It's your government at work. With elections coming in a very few months, it may be time for a wholesale cleansing of the government. In other words, throwing out all of the bums -- Democrats and Republicans alike -- would be a great first step toward better economic times. And, no, we don't seriously think it will happen, but we can always hope it will.

When is the best time to buy stocks? Well, it certainly isn't at the beginning of a recession! But, if you're an investor who isn't satisfied with sitting in cash, there are things called bear market rallies and you may find it profitable to navigate the bear market with a special investment which does well -- if you're positioned correctly -- in all kinds of markets, bull, bear or blah. With the likelihood that the stock market will be in a "blah" phase for some time to come (in other words, until just before the recession ends), it's just the remedy you might need. We discuss it, for subscribers only, in the Notes 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  # 12:23 AM

As Israel prepares to invade Lebanon with its ground troops (it's massing reserves for the invasion, a process which takes some time, as well as hitting likely bunker-hidden long range Iranian missiles from the air), the markets breathed in on Monday and held their ground. But, this very brief intermission won't last and further selling is coming.

Although the Dow inched higher on Monday, far more stocks closed down than up and downside volume was four times upside volume on the NYSE (it was even worse on NASDAQ, where more than ten times as much downside volume swamped upside volume). Despite the UNCH readings on the indices, this is a market still in a waterfall decline.

Once again, the new "short" ETFs outperformed the market, although the gains were muted. That situation isn't likely to last long, however, when the new Lebanese front in the Mideast War heats up again and those excellent hedges against the market correction start moving up again. Those ETFs, which we've mentioned in the last two entries, are the best invention for the average stock investor since Sliced Bread because they allow stocks which have gained capital to be deferred from sale (and thus, taxation) to the future under the owner's control and not under the mandate of the IRS -- unlike regular mutual funds. Sales which generate taxable gains reduce proceeds which could have been reinvested after the correction is over. That's why we say that investors can have their cake and eat it, too!

Is this rapid decline setting up a buying opportunity in many of the markets? Yes, as all big declines in the stock market do, there's almost always a pot of Gold at the end of the rainbow for those who can see beyond the daily news noise. For example, at the end of the largest correction in the stock market of the 20th Century, John Templeton, a clerk on Wall Street, borrowed money from his employer and purchased shares in every NYSE company whose shares were selling for $1 or less. By the end of the decade, Templeton had not only repaid his employer, he was an outright millionare and well on his way to making a lot of other investors wealthy via his mutual fund company.

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  # 9:25 PM

The waterfall decline on Wall Street continued on Friday as Israel continues its campaign to eliminate the threat of rocket attacks on their country posed by Hezbollah terrorists in Lebanon. Intelligence sources point to Iran as the party most likely to be backing the terrorists' recent rocket attacks on Israel from Lebanon, with the goal of averting attention from their controversial nuclear fuel production program. The new front on the Mideast War threatens to spread to Iran with the possibility of an interruption in the supply of oil that could send prices of USO (the oil ETF) and IAU (the gold ETF) soaring even more than they already have.

Political news aside, the market is moving down just as expected in this correction, which was well telegraphed by our excellent indicators and market analysis. A major cycle low is causing the decline and this event is exactly the kind of news background that typically drives investors to sell. When the low finally lands, those who failed to sell at an opportune time going into the recent highs almost a thousand Dow points overhead will no doubt be selling in a panic when those who sold when conditions were right for selling (i.e., when we said to sell) will be buying instead. After all, when they are throwing babies out with the bathwater, someone smart should be there to catch them! We sold near the highs when the market was ripe for selling and we intend to be buying when the market is ripe for buying -- when the crowd is selling in a panic.

As one would expect, the new Profunds "short" ETFs which we mentioned on Thursday evening, were some of the very few stock-related investments (other than the commodity ETFs) which gained ground in Friday's trading. The ones we mentioned -- DXD, MZZ, QID and SDS -- all gained about 2% for the day. As we mentioned, these new short ETFs can be purchased instead of selling shares out of your portfolio. The advantage is that as they gain ground, you avoid paying taxes on accumulated capital gains (as long as you hold your shares with capital gains, those gains are not subject to taxes from the IRS). The gains from the short ETFs can offset some or all of the losses on the other stocks you hold in your account. This puts you ahead of the game because selling and having to pay taxes on the gains reduces the amount you can reinvest later. The moral of the story is that if you hedge against a correction and not sell out, you are better off in the long run. This principle applies only to taxable accounts.

Of course, the news sent our investments soaring even as most of the market was plummeting. But, one or more of them may be topping soon and it's time to get ready to switch horses. In addition, one of the investments which we have been monitoring which requires less than $1200 initial margin to play is getting ready to turn the corner, having fallen almost $9000 per unit in the last six months. Subscribers can follow the Notes link below to find out more.

Interestingly, Elliott Wave International, which is having one of their Free Week promotions through Wednesday, discusses the components of this particular investment, but doesn't mention what a huge profit potential it has. For those who've joined Club EWI (see the link above or on the blog to sign up) and have been reading Steven Hochberg's Friday evening commentary at the ElliottWaveInternational website, our idea is completely in tune with his analysis. The difference is that we tell you how to profit from it far more!

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  # 12:02 AM

The stock market tipped its hand -- or should we say its shoe? -- as it continued to slide down the second leg of the correction which started in mid-May. In fact, the NYSE Composite Index continues to track the roadmap we laid out for it back in late April. If that market continues down that road, investors are going to have a great buying opportunity once the cycle that's hard down right now lands and takes off to the upside. That date has been posted on that chart for three months now and we're getting additional projections which point to the same date. It should be a great opportunity to switch from being bearish to being bullish.

One of the biggest bull markets, though, continued to make headlines on Thursday: oil. The naysayers have been disbelieving the rally since oil went over $40/bbl and, now that it's almost 100% higher, they are still bearish. Reminds us of some other permabears we know. In any case oil-related stocks remain relatively undervalued because the permanently higher price of oil has yet to be fully factored into stock prices.

While it's not a bull market, bonds are doing well right now as a safe haven from the turmoil in the stock market. Not unexpected, of course, since we had been looking for a late June bottom in the bond market (top in interest rates), which is exactly what we got. But, once the stock market recovers from its swoon, will bonds be such a good place to be? It may very well be that stocks and bonds will continue to move in opposite directions. So, the bottom we see in stock prices could also be a top in bond prices as well.

New ways to short the stock market were introduced Thursday (what good timing to introduce them on a day which saw the Dow close down about 800 points from its recent high!). Profunds introduced ETFs (Exchange-Traded Funds, stocks which are really mutual funds) which use leverage on the short side. The funds are as follows:

• QID, UltraShort QQQ ProShares
• SDS, UltraShort S&P 500 ProShares
• MZZ, UltraShort MidCap 400 ProShares
• DXD, UltraShort Dow 30 ProShares

These funds could come in handy for those who are looking for a way to quickly hedge against market exposure on the downside, and to quickly remove the hedge when the market makes a recovery. There are normally capital-gains tax consequences from selling shares to avoid a market decline, but hedges can avoid having to sell those shares and then give some of your accumulated gains to the IRS. We suspect that these ETFs will quickly become some of the most popular ETFs in the market as investors realize that they will allow them to have their cake and eat it, too, just like the pros. In other words, instead of selling shares with capital gains and causing a taxable event, these "short" ETFs can be purchased. If the market goes down, they will gain in value and, hopefully, offset the paper losses on other stocks in the portfolio. More information can be found at http://www.Profunds.com/.

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  # 11:22 PM

The stock market continued to slide down the slippery slope on Wednesday as Tuesday's rally faded as quickly as a petunia in the heat of the Texas summer sun. A very significant turning point is coming up and if you're prepared for it, it could mean some very large profit opportunities will be there for the taking in the next few weeks. For now, though, it's like the inmates have been put in charge of the asylum as the market whips up and whips down in a volatile, but relatively narrow, range.

Reviewing the action, we have markets all over the globe which are still in shock from the Bank of Japan's sudden removal of ¥trillions from the world banking system in March. Actually, the BOJ had warned three years ago that they were planning to do this in March 2006, but with that much lead time, everyone assumed they would do so very gradually and gently so as not to roil the markets. To their chagrin, traders found the floor rapidly falling away from them as markets which had benefitted from bubble-level financing suddenly found they couldn't handle the selling pressure and buckled under the load. Some of the markets actually were fairly valued and probably didn't deserve the rough treatment, but when the air is removed from the bell jar, any mice trapped inside will suffocate. And, that's exactly what happened in May as the selling pressure hit the overload point.

Apparently, that sudden dive in the markets wasn't quite what the central bankers had in mind, so they quickly replaced some of the money they had taken out. That gave us a nice reprieve from the slaughter. The question is whether or not they are resuming the draining process once again. If they are, the effects could be magnified in a market whose wounds from the first round are still tender to the touch.

The NASDAQ has been hit much harder than the blue chips, reflecting their sensitivity to deflation. Yes, deflation. When money is withdrawn from the system, it is literally deflation and technology companies are in a constant struggle to maintain profit margins in an industry with double-digit deflation annually. As is always the case, investors' reactions are to sell first and consider buying back later. Right now, we haven't reached the end of the "sell first" period. But, it's coming!

Oh, by the way, the Bank of Japan also is holding billions of shares they bought to help resuscitate the banking system. Guess when they're planning to start selling those shares on the open market? If you've followed Terry Laundry's Advance-Decline T, you already know the answer: October 2007. Expect a crash.

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posted by Bob Carver  # 11:08 PM

This stock market is definitely full of energy. And, Tuesday, it certainly showed how volatile it can be. The initial move to the downside ran out of selling pressure, so the bulls pushed stocks back up to close more than a hundred Dow points above the low of the day.

We are looking for a final thrust rally and this may very well be it. Our lead dog index, the NASDAQ-100, showed early on that it would refuse to give much ground -- actually showed that the sellers just didn't have enough pressure to keep it down. It also showed good relative strength versus the blue chip sectors and finished the day better by 0.52% than the Dow and 0.29% better than the S&P 500 Index.

Our short term trading indicators went into the green at various junctures during the day, but were somewhat reluctant to join the bullish parade. In fact, the strength in the broad market -- or lack of it -- suggests that this is one of those tired encores in the bull market, and not the beginning of a new act in an ongoing performance.

We have options expiration at the end of next week and in case you haven't noticed, we usually get a Dow rally of around 300 points going into expiration week. This may be the beginning of that move.

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posted by Bob Carver  # 10:59 PM

Although the headline indices were virtually unchanged on Monday, the traditional leaders, the Philadelphia Stock Exchange's Semiconductor Index SOX and the NASDAQ-100 Index NDX or QQQQ, were strong on the downside (apparently, the Philadelphia Exchange is so embarrassed by the Semiconductor Index that it isn't disseminating quotes for it anymore). NDX lost 12.80 points for the day.

If history is any guide to the markets -- and, it always is -- this is a very bearish sign. These are the sectors which turn up first and turn down first. The fact that they are leading to the downside should brighten the dark heart of every died-in-the-wool permabear out there. And, it might make a few short-sellers some spending money as well!

There are a few bullish signs left -- very few. And, they are of the short term variety. Remember when we were going into the May top, we pointed out that the elephants who move the stock market would finish off the bull market with one last blow-out rally to force the shorts to buy back their positions? That's exactly how it ended up, with all of the upside targets that seemed highly unreasonable to many last year being met and then exceeded, if only for a few days.

Something similar is likely to happen here. Anyone getting prematurely bearish is likely to see red before the green returns.

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posted by Bob Carver  # 10:19 PM

The US Bureau of Labor Statistics had a shocker of a June Employment Report Friday morning. While the household survey portion of the report closely agreed with the previously-released ADP projection of almost 400,00 new jobs last month, the more widely-watched payroll survey, which should by all rights have been in line with the ADP report, showed only 121,000 new jobs created. With the consensus estimate at 200,000 going into the report, this indicated that the economy may be slowing more than had been believed before.

Indeed, one of the Fed's own measures of economic activity has been showing a similar pattern of weakness in recent months. That measure, the Repurchase Balance, is showing barely more activity in the economy than in the weeks following the hurricanes striking the Gulf Coast last year. The Employment Report thus confirms the Fed's unequivocal statement in the announcement following their last rate hike that economic activity is moderating.

Another mostly overlooked statistic in the report confirmed a weakening economy. First, though, a bit of history which explains why the unemployment rate has stayed so low during a period of time when the economy has grown at a rate far less than at periods in the past when the real economic growth rate was much higher -- it is, of course, the old government "smoke and mirrors" ruse to fool most of the people most of the time:

The BLS stopped counting as unemployed workers who have been out of work so long that they have run out of unemployment benefits and are considered to have stopped actively looking for work, despite the fact that those workers are ready and willing to work. Before the Carter Administration, those long-term unemployed were counted in the headline figure -- and it became an embarassment to the Carter Administration when unemployment soared due to the Oil Crisis and rolling recessions. Once they removed these "discouraged" workers from the count, succeeding administrations found that this statistical "trick" worked very well and it has been retained ever since then. That's why the headline figure of 4.6% unemployed is not a statistic which is comparable to the levels of unemployment before the mid-'Seventies. Back in the 'Sixties, economists believed that 6% was an absolute floor below which the employment rate could not fall.

The confusion today can be cleared up by the "Alternative Measures of Unemployment" statistics detailed by the BLS in Table A-12 in the appendix to the report. And, there the Real Unemployment Rate is given in line U-6 (they give it a different name, of course, but at least they still publish the figure). According to the seasonally-adjusted data, June 2006 had an 8.4% unemployment rate, which was up 0.2% from the 8.2% level of March, April and May 2006. Anyone who experienced prior economic "booms" certainly knows that the current lackluster economy certainly does not qualify for that description -- and, a real unemployment rate of 8.4% seems to be more in line with current experience. Although one month does not make a trend, there was clearly a significant rise in unemployment last month which did not show up in the headline figure. This is another statistic pointing toward a recession ahead.

But, at this point, the Fed's public statements make it clear that they are ready and willing to err on the side of recession in order to stave off higher inflation. While the government's headline measures of inflation don't show an inflation problem (naturally), just like the unemployment rate, one cannot trust those headline figures either. And, now the BLS appears to be on the verge of fixing that problem with a new inflation measure called the "Harmonized Index of Consumer Prices" (HICP).
http://www.bls.gov/opub/ted/2006/jun/wk4/art03.htm

The new HICP is showing inflation running hot at a 3.8% rate this year, after a 3.7% rate last year. That's well above the Fed's "comfort zone" for inflation -- and virtually assures that more rate hikes are forthcoming which are the right kind of medicine to induce an inflation-killing recession.

Thus, the bond market rallied on the increased probability of a 2007 recession, while the stock market slumped on that same prospect. That makes sense if a recession is on the way. Bond prices will rise during a recession and company earnings will mostly decline, making their stock prices fall. That's why a lot of smart money managers have raised cash in the stock market over the last few months and are not willing to buy back in until they see prices a lot cheaper than they are right now. Friday's session did not see panic selling -- it was just a slow, water torture style decline which indicates that the buyers were sitting on their hands and letting sellers drive prices down.

However, any recession that's going to hit the economy is probably at least a year away according to historical indicators which have good track records at forecasting recessions. And, there's a good chance that the Fed will decide to not only stop raising rates, but actually cut them once their models start forecasting slower inflation later in the year. Thus, it's best to remember that the future is mutable and be ready to quickly turn bullish -- at the right time, of course! That's where market timing can make a big difference to your investment profits. And, market timing is exactly what we do very, very well indeed with our intraday and daily indicators which provide excellent signals for short to intermediate-term traders. Last week certainly proved once again just how great those signals can be. Since we still offer a 3-month free trial subscription, signup using the PayPal button above today and check out our Trading Page indicators.

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posted by Bob Carver  # 1:54 AM

The stock and bond markets are eagerly awaiting the June Employment Report due out at 8:30 am EDT Friday. On Wednesday, a report from ADP suggested that a whopping 300,000 new jobs might have been created last month, which caused the bond market to sell off. But, wiser heads prevailed on Thursday as most economists suggested that the ADP Report was unlikely to be a good estimate for the jobs number. However, most forecasters also boosted their estimates to the neighborhood of 200,000, which would still be a fairly strong number.

The bond market rallied sharply Thursday on expectations that the number would be sufficiently strong to force the Fed's hand at their next meeting in August. Another rate hike by the Fed could be the "straw that breaks the camel's back", causing the economy to have a "hard landing". Signs of a slowing economy abound and it's unlikely that the Fed would deliberately push the economy into recession, but the bond market is ever-hopeful of that outcome (a recession reduces the demand for money and thus interest rates -- and bond prices rise when interest rates fall).

We think that 2006 will not only see the Fed end its long string of rate hikes, but will also see the Fed start to cut rates aggressively as it tries to fight off the recession that's coming in 2007. Once the markets realize what's ahead, there are going to be some big moves in financial and commodity prices, indeed!

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posted by Bob Carver  # 10:40 PM

After three weeks of rally, world stock markets decided it was time to take a break to the downside Wednesday. If you listen to the journalists, they explained that it was due to the North Korean missile launches over the Fourth of July. Of course, that would indicate that stock investors had failed to get the news two weeks ago that the North Koreans were planning to do this deed almost any day now. At least we know now what journalists think of investors.

This correction was poised to happen well before the missile launches took place, as we told you days ago (we said the market would rally Monday and that would be the high of the week). But, you have to sell advertisements somehow, even though very few people pay much attention to them nowadays. Journalists are like the motley fools of our time: kept around to make fools of themselves with their ludicrous "explanations" of why the market did this or that. Without them, we might have to actually think and understand why the market moves the way it does. "Always keep the masses entertained and, more importantly, distracted!" has always been a good motto for the Powers-That-Be.

After we took short term profits in stocks, we are ready to buy back. But, Wednesday's market internals don't say it will be soon. In fact, the market may have considerably further down to go before it's a trading buy once again.

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posted by Bob Carver  # 7:14 PM

We've said all year that we expected 2006 to be analogous to 1994 and 1986. So far, those expectations have been met very, very well.

In 1994, the market went into the year on a roll from solid gains in 1992 and 1993. The broad market had outperformed the blue chips by 100% (the Value Line Index's gains were double those of the S&P 500 Index). The market hit a rough patch early in 1994 and dropped about 9% in a six-week correction. In 2006, the market hit a rough patch and dropped about 7% in a five-week correction.

From the bottom of the correction in 1994, the market gained back over 5% in a 10-week crawl to the upside. So far in 2006, the market has gained back 4.62% in three weeks. If the analogy continues, the market could continue crawling back into August as the summer seasonal uptrend levitates stock prices. However, note that in 1994, there were numerous and substantial dips back toward the lows, which kept the bears eager to sell every dip. Unfortunately for them, each dip was followed by another rally to a relative new high, which forced them to cover their shorts at a loss. After 10 weeks of this kind of stop-start, the bears were either exhausted or broke. The bulls were ahead, but not by more than they would have earned in a safe money-market fund, so it was generally a hollow victory at best.

1986 was also similar to 2006 as the market entered a trading range in the second quarter with small dips and rallies for the rest of the year which made it a short term trader's market. Once again, the message the market was sending was that it didn't pay to be either a bull or a bear on stocks -- the only long term investment which made money in 1986 was money-market funds.

The reason why we correctly forecast 2006 to be an analogous year to 1994 and 1986 was that we recognized early on that the Rising Rate trend would make it very difficult for stocks to beat money-market funds, just like the two prior years. Until the Fed stops raising short term rates, the stock market will continue to struggle and money-market funds will continue to beat stock returns.

This kind of market environment is very poor for options speculators. Although we saw a rise in volatility recently, that volatility is likely to be falling for the rest of the year and that means that option time premiums should be falling as well. Both of our analogy years were great years for option sellers, however, as the narrow trading range provided ample opportunities to sell calls when the market was near the top of the range and to sell puts when the market was near the bottom of the range.

From here to the end of the year, the market will probably gyrate within the range of prices it has already traced out. And, we won't change our forecast that money-market funds will beat the indices in 2006.

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posted by Bob Carver  # 5:52 PM

While the quarter was a rough one for investors, the buying opportunities it presented were excellent. Led by the precious metals and energy-related stock sectors, as well as the small- and mid-cap sectors in the closing days of the quarter, the market put in a nice June low and rallied well enough into the close to mitigate the losses considerably in many sectors of the market.

Even the bond market, which had been depressed due to the incessant chatter of Fed Governors harping on inflation concerns, was able to rally after the Fed announcement on Thursday that the long series of rate hikes was likely to be finished. Although the reaction on Thursday to the Fed was somewhat muted, Friday's session saw strong gains in bonds. This left the yield curve (the difference between the yield on the 10-year Treasury Note and the yield on 91-day Treasury Bills) perilously close to inverting and that is a danger sign for the economy, but not an immediate signal that a recession is imminent. Our projections for the yield curve suggest that a period of yield curve inversion will occur in the latter half of the year and early in 2007. Since yield curve inversions are the best predictor of economic recessions available, this suggests that the next recession in the US will occur in the second half of 2007 (recessions usually start one year after the yield curve inverts -- but only if the inversion lasts for 90 days or more). Once a recession starts, stocks do very poorly, while bonds do very well.

However, forecasting a recession to occur more than a year ahead does not mean it's time to exit stocks. In fact, some of the best rallies in stock market history have occured in the months leading up to the beginning of recession. Some analysts will claim that the stock market predicts recession six months ahead by turning down ahead of the beginning of the actual recessionary period, but our studies have shown that market peaks tend to occur coincident with the actual beginning of recessions. That historical 6-month lag time is a phenomenon caused by the time it takes for economists to realize that the economy has been a recession (usually, few, if any, economists correctly recognize the beginnings of recession). Econmists usually wait for two straight down quarters before they will identify a recession. By that time, stocks have usually been in a substantial downtrend for six months. In fact, in some cases, the stock market will be closing in on a bottom when economists finally declare a recession underway.

US Independence Day (4th of July) 2006 Holiday Schedules

Chicago Mercantile Exchange
Chicago Board of Trade
New York Board of Trade
New York Stock Exchange

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posted by Bob Carver  # 3:38 AM