Market Clues

Here we are again at the beginning of a new month and the Employment Report for August will be released at 8:30am EDT Friday morning in Washington, DC. Once again, the markets' reaction to the news is the key point here, not the news itself. A weak reaction after an extended rally in stocks could be a sign of a correction starting. More likely, the market will extend the rally even further.

The first reaction will come in the futures in Chicago. At the Chicago Board of Trade, bond traders will be looking for signs of relative weakness in the numbers of new jobs and signs of contained inflation in the employment cost component. And, at the Chicago Mercantile Exchange, stock index traders will be looking at the bond market and the data to determine whether the Fed has finished its rate-hike campaign and might perhaps start easing rates before too much longer. This news will hit the market before the NYSE's official opening an hour later in New York. Moves in the futures in Chicago will determine how stocks open.

After the news is out, there could be extreme volatility if historical norms are followed. But, with the long three-day weekend ahead (Labor Day), we suspect the market will settle down by noon as traders take the afternoon off.

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  # 10:40 PM

The Russell 2000 Index -- the 2000 smallest stocks within the top 3000 traded in the US -- has been particularly strong over the last few days, going against the common belief that small stocks have relinquished the reins of leadership to the big, blue chips of the S&P 500. After seven years of outperformance most (including us) have been expecting the blue chips to lead. That has not happened yet and it's just another reason to think that the coming bull market in stocks is going to be far stronger than most expect.

The 4-year cycle is due to land soon. We like to call it a "landing" rather than a "low" because the latter phrase implies some kind of price minimum and that's seldom the case when a cycle "low" is made. Due to the influence of fundamental factors, cycle "lows" often do not coincide with price lows. Thus, a cycle landing usually signifies a trend reversal to the upside from a down or sideways trend.

This year, we have seen the bulk of the correction occur in May-June. The NASDAQ was down more than 15%, which is within the "normal" 4-year cycle landing range of between 15-20% off the prior high. We can ascribe the correction not to overvaluation of stocks -- stocks are relatively undervalued compared to historic norms -- but to the calling-in of Japanese cheap money yen loans to hedge funds. The Japanese central bank drastically reduced the amount of money in circulation in March, triggering the forced liquidation of large stock positions in April and May. By June, Japanese central bank realized what turmoil they were causing in world markets and temporarily re-injected funds back into the system to stablize world markets. In July, the Japanese drained those temporary funds again, giving us the July price low. In most broad-based indices, the absolute price low occured in July, a time which corresponded to a projected 39-week cycle landing, while the S&P 500 Index merely retested its June low and failed to make a lower low, another example of a cycle landing which did not correspond to a price minimum.

It now appears that, just like the analog year of 1994, which we identified as one of two excellent model years for 2006 well ahead of time, the 4-year cycle landing this year would not likely correspond to the actual price low, but to a retest of the earlier low. That's why we told subscribers to buy the first low, but be prepared to sell when the market falters.

Looking ahead, the 4-year landing is typically followed by an average advance of approximately 50% in the stock market, most of which comes in the first year of the bull market. So, getting in late will severely reduce your returns. For example, after the last 4-year cycle low, the S&P 500 advanced almost 49% in the first year of the bull market. In retrospect, this year has demonstrated the value of subscribing as we told subscribers to sell into the rally and buy back near the lows. Those who followed our advice have added to profits gained from being bullish when the time was right to be bullish. And they have avoided losses when it was the right time to be bearish. If you haven't subscribed yet, what are you waiting for?

Our latest analysis of the stock market for subscribers only can be found using the Subscriber 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  # 9:48 PM

While we've used the technical term "flat correction" to describe the stock market's movements this week, it all boils down to a simple job of "street-cleaning". With the Employment Report coming up Friday, the stock market is getting ready for the big day by making sure the weak hands have been cleared out of the market. It has done this by sweeping from the bottom to the top of the trading range, then back again, repeating again and again. Continued for several days and the weak hands are swept clean out of the market.

That's because the weak hands tend to sell at the bottom of the range and buy at the top. If they're bearish and sell short, they have to endure the pain of a rally that puts their positions underwater. If they're bullish and buy, they have to endure the pain of a decline that puts their positions underwater. So, they do what they have to do: they cover for losses and they're out of the market.

Thus, the S&P 500 Index has swept over a total travel of more than 30 points in the last few days. Compare that to the fact that the market tends to take six months just to move 50 points in a trending market, which we do not have:

Are we waiting for Godot, or what? Subscribers should use the Subscriber Notes link for 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).

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posted by Bob Carver  # 9:53 PM

It was too hot for some of the bears Monday as they became buyers and closed out their short positions on an otherwise slow semi-holiday Monday. London was closed and volume in New York was only about 2¼ billion shares, down from a typical day of close to 3 billion shares. That makes the sharp rally a bit suspect in terms of validity, but the rise was apparently enough to convince a few of the weak hands to cover their losing positions and help the bulls out a bit.

The markets will be looking forward to Friday morning when the Labor Department will release the August Employment Report. The bond market has been rallying on the idea of a slowing economy and, considering how low interest rates have gone based upon that assumption, a strong report would undoubtedly send bonds into a profit-taking tailspin. So, the stakes are incredibly high for bonds. And, since stocks tend to follow bonds (with a variable lag time), the report will be a key component in setting the trend for stocks in coming months.

Subscribers should click on the Subscriber's Notes link below for detailed comments on Monday's markets.

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  # 9:48 PM

Stock markets have been trading sideways for months now and this has turned the average investor quite bearish -- exactly what you want to see if you're a contrarian investor. Since the May high (April in NASDAQ), stocks have seen a sharp correction and a rebound to near old highs. At the same time, sentiment has gone from overly-bullish to persistently overly-bearish on our short term option trader gauges. Longer term investors are now growling bears who point to everything from a "tapped-out" consumer to terrorism fears as reasons to avoid the stock market.

This is exactly what a contrarian investor should be taking as a good sign that the market is forming a long term low and buying opportunity. Historically, this is the pattern of sentiment that is seen at bottoms. And, typically, this kind of sentiment backdrop is followed by gains of 50% and more in the broad market. Examination of the following chart should be instructive -- see if you can spot the buying opportunities:

The bears are always quick to point to the problems. But, people are adaptable and we fix problems. "If you fall off the horse, dust yourself off and get back on!" is also the motto of the stock market. Note that the Georgia bears declared the stock market was basically dead in 1987 with the Dow below 2000. The close Friday was well above 11,000 -- and the Dow has underperformed the broad market since it was invented. The gain since the 1987 low in the broad market has been over 900%! The bulls always win in the end as long as they don't lose their nerve. Keep buying the dips -- it simply means stocks are on sale and any good shopper knows you win buying low and selling high.

Details on these and other market turns upcoming are reserved for subscribers, who should follow the Subscribers Notes link below for additional analysis.

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  # 12:12 AM

Or, the beaches as the case may be. Volume dwindled as big money players deserted Wall Street on Thursday. The Volatility Index reflected the lack of trading as it moved closer to a multi-decade low set just about one year ago. That's no coincidence since summertime in the city is not something one wishes to endure willingly.

The heat has been something else this year. And, even in the Southern Hemisphere, winter seems to have taken a leave of absence as temperatures are well above average for this time of year. Could it mean a long, hot dry spell ahead? It could indeed. This weekend, we'll take a look at what that might mean for commodities.

The bond market has been pushing higher since it formed a low in late June. And, that engine has helped pull stocks up the hill. Tonight, given the lack of interest in a trend in stocks, we will discuss what to look for in the bond market. It should definitely bring in a trend change in both markets (see link below for Subscriber Notes).

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  # 10:56 PM

The game of cat and mouse proceeded smoothly on Wall Street Wednesday. Except in this case, the mice were the bears who are ever-willing to sell the market short. The cats used a meaningless and completely anticipated housing report as an excuse to rachet prices down to entice the mice into going for the bait.

This "meaningless" report was one which Wall Street normally completely ignores. And, in fact, everyone already knew what the report was going to say, so it was no surprise to the market. But, on a day when the short interest was being invited to play, the media chimed in with their headlines: "US stocks slide on weak housing data, Iran standoff". The journalists can always be counted on to give the wrong reasons for stock prices to slide and Wednesday was no exception. Reuters even quoted a permabear to solidfy their bearish stance (this analyst has been bearish since the Dow was below 1000):

"The housing market doesn't seem to be cooling; it actually seems to be getting frigid," said Michael Metz, chief investment strategist at Oppenheimer & Co. in New York. "The weak data, combined with Iran, was more than enough to send the market lower."

And, thus, the trap was baited and the shorts fell right into it, selling into the hole. Just before the NYSE close, the cats came out and prices jumped back up, cutting their losses by half. After the NYSE close, the cats continued to take the cheese from the mice in the futures session. By the regular close in Chicago, the Dow's losses had been cut by well more than half. In fact, overnight futures are at a substantial premium to the cash market. If that premium is maintained overnight, the shorts will find they will have some substantial losses in their short positions and will be forced to pay up just to get out. It appears the mice will never win at this rigged game, but they just keep coming back for 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).

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posted by Bob Carver  # 9:10 PM

The stock market has been consolidating last week's gains and moving sideways in a tipsy fashion this week. Well, we can't blame the old man for celebrating too much and then having a bit of hangover this week.

The bears obviously don't like the looks of the old drunk, though. They're so concerned that they're buying lots of puts -- protection against a crash. On Tuesday, OEX option players bought only 60¢ of calls for every dollar of puts, indicating they were back to playing the old bear game. That's reassuring since they are seldom right.

Tuesday failed to live up to their expectations as the market staggered to a virtually unchanged finish, with the broad market showing strength compared to the blue chips. That's not something you want to see if you've just loaded the boat with puts.

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

The bearish option speculators came out Monday to try to catch the downside. This tendency to sell every dip is quite bullish and indicates the market trend is still up.

Corrections are normal within every uptrend. They are caused by bullish investors taking profits and serve to release built-up tension. The fact that the dip was shallow and well-supported suggests that more than a few bears were using the dip as an opportunity to cover their short positions.

We have some specific targets for the next trading top in this market and subscribers should follow the link below for more information.

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  # 9:15 PM

Since the 39-month cycle bottomed in mid-July, the stock market has made excellent gains. While the permabears are counting every rally as just a warmup for the next big crash to oblivion, the venerable Dow Industrials has gained 6.4% (which translates to a whopping 139% gain on required initial margin for the Dow futures -- a gain of 51.4% just in the last week). Even the downtrodden NASDAQ market made an appearance on the positive side of the ledger last week after being beaten up severely and left for dead in the May-July rout.

What we have seen is exactly why we advised investors to buy back into the market with cash we had preserved after selling into the final stage of the rally earlier in the year. Although the rally may ultimately prove to be a bear market rally and we may have a retest of the lows to look forward to in the future (after all, the 4-year cycle is scheduled to land right at the same time as the Congressional Elections this November), the rebound off the 39-month cycle is definitely worth getting back into the market for. In fact, our roadmap for the year -- which uses the analogous years of 1986 and 1994 -- has been working out absolutely precisely and has been telling investors when to move to the sidelines and when to get back into the market. Consequently, we're currently well ahead of last year's big gains in the stock market already, despite the overall neutral trend this year.

It's apparent that the average investor just doesn't get it. While the Dow has been powering ahead, a look at the Commitment of Traders Report, published by the US Government each Friday afternoon and reflecting the position of large traders, commercials (bankers) and small traders as of Tuesday's close, shows that small traders were holding 51% of the total short interest in the Dow -- in other words, traders with accounts too small to qualify as large traders constituted the majority of bears in the market. In fact, those small traders were 84% bearish as a group and only 16% bullish. When you get the crowd of small traders mostly looking for a downturn, it's like taking candy from a baby -- and that's exactly what the market did last week as it ground away at those small accounts and made them even smaller.

By the way, the government is considering changing this report, and is soliciting public comment until Monday, 21 August 2006. If you would like to submit your comments, see this CFTC Press Release for details -- http://www.cftc.gov/opa/press06/opa5190-06.htm

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  # 1:02 AM

The market went sideways Thursday after the opening rally faltered.

The short term traders who were buying puts on every rally are now favoring calls. While that doesn't indicate an immediate end to the uptrend, it does suggest that we should start to look for divergences in sentiment against new highs in price next week. If the amount of money spent on option purchases diverges against the money spent this week, it will be a strong sign that the rally is basically over. Generally, that indicator will give a 2-day "heads-up" signal to watch for a top in the market.

Friday is options expiration day and you know what that means: Maximum Pain for option buyers. This is the term used to describe the maneuvering of optionable stocks to a price such that option holders lose the maximum amount of money at expiration. After the big rally this week, that generally means that once the rally reaches that maximum pain price point, the market is likely to move exactly sideways into the close Friday.

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  # 9:36 PM

The market continued to rally Wednesday.

Both the bond and the stock market liked what they saw Wednesday morning. The Consumer Price Index and housing data both gave the markets a big lift. This reaction is a positive for the bulish short term trend.

The rally in the bond market sent long term interest rates plunging below 5% and pushed the yield curve further into negative territory. Although this increases the chance of a "hard landing" in the economy next year, the stock market is ignoring the implication of an inverted yield curve for now, preferring to focus on the possibility of a Goldilocks scenario of a pullback in inflation that doesn't reduce corporate profits. The success of the Greenspan Fed in achieving this feat of modern economic engineering seems to now be an assumption of the markets. Of course, we don't have enough of a track record of the Fed achieving this goal to say that they can or cannot do it again, but we certainly wish them luck.

The European markets were generally sanguine about the future as many rallied Wednesday close to old highs. A notable exception was the London market, which remained rangebound despite the big rally on Wall Street. Asian markets were mixed, with Japan strong and Australia, like Britain, the weak sister. It's interesting to note that both Britain and Australia are coming off big housing-driven booms that went bust in a benign way. The central bankers were apparently able to engineer soft landings in both countries similar to what our Fed is attempting in the US. The markets' confidence in the Fed may be based on more than wishful thinking after all. But, the jury is still out on the ultimate fate of both of these recent "boom and not bust" success stories as we probably will need to see whether their economies can continue to grow in the face of strengthening headwinds this year and next.

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  # 9:22 PM

The market advanced smartly all day after Producer Prices were reported to have declined last month. This bolstered the statements of the Federal Reserve which claimed that a slowing economy would produce lower inflation rates in the future. Thus, the bond market rallied and stocks tagged along for the ride, ignoring for the moment the possibility that a slowing economy could eventually land in recession with lower earnings across the board.

The Consumer Price Index will be released Wednesday morning. It measures a very different statistic, one many believe will continue to show a rising price trend. While knowing the figures to be released ahead of time is something a lot of traders would love to know, the reality is that the markets' reaction to the news is far more important than the news itself. For instance, there was a time in the last decade when the bond market was deathly afraid of a growing economy because it believed (wrongly, it turned out) that stronger growth equated to higher inflation, which is death for bond returns. A government report showed a stronger than expected economy -- bonds sold off for all of 20 seconds, bottomed and rallied sharply. Any trader who knew the news ahead of time -- and some employees of the Commerce Department were actually doing a bit of surreptitous communicating to traders by arranging items in a window to give them a "head start" on the news -- and shorted the bonds ended up with a huge loss as the market did exactly the opposite of what the average trader thought it would. That reaction from the bond market was the important news of the day.

The bottom line: watch the markets' reaction to the news, not the news itself, for direction. An unexpected reaction tells volumes about where the markets want to go.

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  # 10:46 PM

The market sprinted to the upside Monday morning, forcing bears to cover their shorts.

The market gave back most of its gains later and closed only slightly higher. The bulls were disappointed that the early triple-digit gains on the Dow were mostly given back, while the bears were still hoping for an outright victory. The initial rally probably had to do with short covering and the afternoon selling probably had to do more with bulls taking profits.

Sentiment was mixed, also, as the OEX traders continued to lean toward the bearish case, although not overly-bearish. Still, the market has had an upward bias since the 18 July low at Dow 10,684 and Monday's close of 11,098 put the senior average well over 400 points higher with little sign of turning the very short term option traders bullish. That bodes well for further gains.

Another bullish sign of further rally this week of options expiration is the relative strength of our lead dog indices, the Semiconductors and the NASDAQ-100. Both forged well ahead of their bogey, the S&P 500, on Monday. The Semis advanced a full percentage point more than the S&P 500, while the NASDAQ-100 showed a +0.42% advantage. Typically, the lead dogs will move ahead of the Dow and S&Ps. If that's the case again, the bears may have more wounds to endure this week than an early week wind sprint to the upside.

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  # 10:38 PM

Most markets -- commodities, bonds and stocks -- were down last week as the market adjusts to the new interest rate regime. The Fed announced it would not hike short term rates and sent the Fed-watchers into paroxysms of analysis, with the goal to determine just what the next move would be.

With world economic growth downshifting -- and possibly screeching to a halt -- central bankers are faced with a quandary: inflation or deflation? The facts indicate inflation is a danger, yet the forces of deflation are as strong as ever. Will the central bankers repeat the mistakes of 2000 and tighten too much? History says yes, but experience says the Fed learns from its mistakes and avoids them. Of course, as Jesse Livermore said, the family of mistakes has a multitude of relatives and that suggests that a recession may not be avoidable.

In any case, the current malaise of the markets may simply be an adjustment which had to be made before the next leg up in the various longer term bull markets. As such, we are, most likely, being presented with a great long term buying opportunity for when those bull markets resume.

Some leading indicators are pointing to a specific timeframe for the next bull market. Subscribers should follow the Subscriber's Notes link for analysis of stocks, bonds and many commodity markets in our weekend analysis section.

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

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posted by Bob Carver  # 12:27 AM

The government's so-called "security experts" banned all liquids from air travelers Thursday in a bid to bolster public confidence that they were doing their jobs. They probably did fool the masses who believe that sort of stuff, but as the real security experts point out, "air security focuses on past threats" and they should really be prohibiting watches, calculators and laptop computers if they were serious at preventing another 911 incident.

So, while air travelers were inconvenienced by Thursday's futile gestures, the stock market rallied. Why this odd reaction? Well, perhaps they believed the government that the threat had been stopped for now and that the status quo would soon prevail. Or, maybe the market saw lower energy and metals prices as a sign of cooling inflation and that would lead to lower interest rates from the Fed. Whatever the reason, stocks opened at their lows of the day and quickly rallied, closing very near the highs of the day.

One thing Thursday's lack of downside action clearly shows, though, is that the bears who loudly proclaim that the stock market will go much lower are unable to follow through. If they can't get the market down on a "bad news" day, what will happen on a "good news" 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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Subscriber Links: MyClues Home · Quarter-Hourly Chart Comments · Detailed Comments . . . .

posted by Bob Carver  # 10:39 PM

After being in denial about the prospect of a recession for several months, the stock market finally saw that possibility as very real and sold off on Wednesday, a day after the Fed had essentially declared the risks to the economy were too great to hike rates one more time. The Dow was off triple-digits before recovering slightly at the close as bargain-hunters stepped up to the plate to accumulate relatively cheap shares.

Actually, the Fed's inaction yesterday, combined with the bond market's racheting lower of long term interest rates (by which action the previous Fed rate hike was declared by the market "null and void") makes a recession less probable -- and rate cuts more probable in coming weeks. Combined with the fact that China is back to exporting deflation (they had been exporting inflation until just a few months ago) and you have a stock market that's looking the wrong way for direction: in the rear view mirror. And, that means that stocks are being sold for the wrong reasons. The Fed may very well surprise the market with emergency rate cuts in coming weeks as they wish to avoid a repeat of the 2000-2003 recession. Another recession coming so close on the heels of the prior one could be devastating to the economy given the severe slump in housing and the explosive rise in gasoline prices putting a huge crimp in consumer disposable income in recent months. Thus, the very real possibility of rate cuts from the Fed is very high before the end of the year.

That doesn't mean that we're going to see the market bottom right away and rally. But, it does mean that the market is taking an overly-bearish view toward the future and, at some point, will realize the error of its ways.

In fact, the big money players, after selling the rally earlier in the year, have already started buying back stocks again -- an accumulation program -- on the dip. These players cannot move in and out of the market like day-trade jackrabbits. They have to move more like whales -- slow and easy to avoid creating great waves in the ocean called the market. In order to sell their positions, they have to be able to find buyers. The best time to find buyers is when the market is moving up, as it was from October to May. During that long rise, they were pushing shares out to the buyers, distributing them in a market where the buyers thought they were getting a good deal. But, it allowed the big players to distribute their shares at good prices without ruining the price structure of the market.

By May, the veneer was running thin as the BOJ (Bank of Japan) had pulled the plug on global liquidity in March and called in their loans. Hedge funds had been selling to meet calls on loan money, but the supply of shares to sell became too great (the buyers finally wised up and backed off) and the price structure of the market broke down very quickly in mid-May.

The best time for these same large players to do their buying is on dips because a plentiful supply of sellers are available and such buying can be done without sending the prices of those shares up. In order to accumulate large quantities of shares, a willing supply of sellers must be available. Right now, the public is interested mostly in selling, not buying, so the supply of sellers is adequate. Once the big players have finished accumulating their inventory of shares, they will have absorbed all of the supply of shares on offer and the only thing left for the market to do will be to go up. Of course, as you probably know if you've been investing for long, the "dumb money" at that point in time will be the jackrabbits who have accumulated paper profits on their short sales. When prices start going up, those jackrabbits will have to become buyers in a hurry or risk their profits disappearing.

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posted by Bob Carver  # 10:32 PM

The mounting evidence of a serious recession, possibly far more devastating than the 2000-2003 dip, caused the Fed to stop the long series of interest rate hikes Tuesday. Although they left the door open for more hikes later, the chances of that happening are zero. With growth in the economy grinding to a halt, another interest rate rise would simply lay the Fed open for Congressional action to weaken their power over the economy.

Clearly, the Fed has already gone too far. The bond market said as much by keeping all interest rates below the overnight Fed Funds rate that the Fed directly controls. If the bond market continues to rally (lower rates), it will be more evidence that the next Fed move will be to lower short term rates.

Unfortunately, the Fed's action proved to the stock market just how bad the economy is right now. Consequently, instead of rallying on the "good news" of a pause, stocks fell sharply, closing near the lows of the day. Historically, the stock market does very poorly once the Fed stops hiking rates due to the fact that the economy is falling into a recession and earnings are poised to decline.

Stocks should continue on the downside into the anticipated 4-year cycle low later this year, then rally 50% higher (that's the average gain from a 4-year cycle low, by the way) as the Fed lowers interest rates to pull the economy out of recession. Stocks make their best gains in recessionary times, so investors have a lot to look forward to: cheaper stocks in the short term, but better buying opportunities for the long term. This is exactly what a long term investor should be looking for: accumulating stocks when they're cheap and selling them when they're dear.

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posted by Bob Carver  # 10:15 PM

If the Federal Reserve is smart, it will lower interest rates at Tuesday's meeting. However, the Fed is looking at the wrong data and will likely pass on hiking rates this one time. But, what they have already done may have sealed the fate of the economy. After all, the Fed has more than quadrupled rates in the last three years. In a basic deflationary environment, which is still the case, that is a huge body blow to the economy and the recent sharp decline in economic growth is a harbinger of what's to come.

A good assessment of the economy and the recent outbreak of inflation (including why it won't last and deflation may still be the larger problem) is provided in John Mauldin's latest Outside the Box letter. You can read it at this link. ( http://www.investorsinsight.com/otb_va_print.aspx?EditionID=365 )

Even so, it may be almost a year before the recession arrives and stocks could very well have another big rally left in them before that time. Until then, we have the bond market, which has ratcheted long term rates lower in reaction to the Fed's big mistake, acting as a counterbalance to the wayward Fed.

The Federal Open Market Committee meets Tuesday and will announce their decision shortly after 2pm EDT. If the Fed should hike rates, it would cause a stampede out of stocks and into bonds, so be prepared for that event (even if the probability of such an enormous mistake is vanishingly small). If the Fed stands pat, the markets are likely to react with short term volatility, but with little in the way of a trend direction change.

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posted by Bob Carver  # 10:26 PM

The stock market rally continued on Friday, boosted by the Employment Report which indicated a sharp increase in the number of persons unemployed. Profit-taking late in the day ahead of the weekend trimmed the gains and the market closed flat for the day. Traders were unwilling to hold long stock positions over the weekend as the fighting in Israel and Lebanon is seemingly intensifying daily.

Subscribers were able to capture an astounding 70% return (estimated based upon an assumed 1% trailing stop loss order) on required exchange margin on the rally ($2280 per single contract!) after buying very nearly at the low of the day on Thursday morning and using a trailing sell stop to take profits when the rally faded Friday afternoon. The smallest subscriber to our paid service with a modest account and a one-contract position covered the cost of their subscription for the next 10 years on this single trade! We know it has been a tough, frustrating year for most investors, but our subscribers are getting the best deal around and building their account equity in good times as well as bad times like now. Compared to most services, our rates are rock-bottom at just $233 per year (or $79 per quarter).

We are going to be introducing new indicators which we are working on right now that promise even larger returns in the future. Stay tuned, we know you'll be pleased! The bear market will be ending soon and the gains ahead should be fabulous.

The Employment Report released Friday morning confirmed what our other indicators have been saying for some time. That is, this is an economy that is quickly losing momentum. The big shocker to the markets Friday was that the annual rate of increase of the number of persons finding themselves unemployed is 50%. Yes, if the unemployment rate continues to increase at the same rate it did from June to July over the next year, the number of persons unemployed will rise by about 3 million (the number of people who lost their jobs in July was 248,000). In fact, the total number of persons employed declined by 34,000 in July. Clearly, an economy where the number of persons employed is declining cannot be claimed to be a "strong economy" as the current Administration claims it to be.

The market is betting that the rapidly-slowing economy will stay the Fed from hiking short term rates on Tuesday. However, if the Fed does hike rates in the face of a weakening economy, they will be confirming that their goal is not a soft landing for the economy, but an absolute hard landing (depression). If that's what their goal is, we'll know by Tuesday afternoon. Until then, the best way to bet is that the Fed will be reasonable, not raise rates and will, in fact, start lowering rates before too long.

If they're aiming for a depression, the best investment choice will be bonds. The bond market will act opposite the Fed and will lower long term rates to counteract the drag from short term rates. In fact, that's exactly what the bond market has been doing since late June -- they have lowered long term rates by 28 basis points (hundredths of a percentage point), which is more than the Fed raised short term rates (25 basis points). Lower long term rates translate to higher bond prices and substantial capital gains for investors. Bonds are not just for coupon-clippers, they are a very profitable investment vehicle for capital gains. Since the last Fed rate hike, in fact, the September US Treasury Bond with a face value of $100,000 has risen $3,850 in value, which is almost three times the margin requirement needed to buy the bond ($1,350)!

Otherwise, if the Fed doesn't hike rates, stocks and commodities will be the favored investment areas to focus upon if we're to have a soft landing in the economy. Of course, at this point, it may just be too late to avoid that hard landing since the Fed's prior moves to hike rates may have sealed the economy's fate already. In that case, the Republicans will have spoiled any chance they have of keeping control of Congress and the White House after the elections in November. Given the Administration's propensity for shooting itself in the foot at every turn, simple stupidity appears to be the simplest and most likely explanation for the actions of the Fed in driving the economy right into the ground!

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posted by Bob Carver  # 3:07 PM

As expected, the US stock market broke out above the recent trading range on Wednesday. But, first, also as expected, one final dip to the bottom of the range gave short term traders the opportunity to buy cheap (just 30¢ from our posted price) and to sell dear in the afternoon. From the low of the range where we told subscribers to buy to the high of the day earned traders over $1800 per contract, which was about a 50% return on exchange margin.

But, there's one sector that's been a big winner (and just happens to be one we remain invested in) and it looks like it may form a trading top very shortly. Thus, for those who are short term in nature (we tend to hold these stocks for the longer term bull trend), it's probably a good time to start thinking about selling and putting those trailing stop orders in with your broker.

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  # 10:21 PM

It appears that the crowd is mostly on one side of the boat now: bearish. Is this enough to get a good rally off the ground? No, probably not for long, but it is the kind of setup the market needs to get a short term pop off the ground. And, every litle bit helps when the market is trying to form a base.

The market saw some big names sell off this week. Google had a big plunge. The interesting thing about Google is that buyers have been buying the dip -- or, at the very least, not selling into the dip, which demonstrates longer term bullish conviction. We'll see whether that confidence is borne out in coming months. We suspect it will be if the polytrend support line comes into play:

The market had good breadth Wednesday for a trading range environment. Though the bear market isn't over by a long shot, the worst of it may be behind us now. And, it does appear that the buyers, although selective, are beginning to come back into the market to accumulate stocks on sale. That should be a supportive factor on future dips as the 4-year cycle bottom is due right now. The typical rally out of a 4-year cycle low is for at least a 50% gain. It's not unusual to see the market more than double coming out of this cycle low.

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  # 10:28 PM

The Federal Reserve watchers are debating what the FOMC (Federal Open Market Committee) will do with short term interest rates next week. Will they hike rates again, or will they pause? The feeling is that what the Fed does with short term interest rates is going to determine how the markets move over the next few weeks.

We suggest a heretical alternative. What the Fed does at this point in the cycle is basically irrelevant. In fact, we claim that the Fed will follow, not lead, the markets in upcoming policy decisions. Here's why:

The Federal Reserve has control of the short term supply of money and the rent on that money, which is known as interest rates. The supply of money consists of very short term loans between banks and other short term debt instruments. In normal times (and we are definitely in normal times), the Fed does not attempt to set longer term interest rates -- the bond market does that. The workings of the free market are a more powerful force and the Fed recognizes that fact. Thus, whatever the Fed does can only affect short term interest rates directly and their policy moves only have an indirect effect on longer term rates.

Since the last Fed rate hike, the bond market has made a policy move on long term rates. It has decided that long term rates are too high and has racheted those rates lower in a contramove to the Fed hike in short term rates. Thus, we have the 30-year bond rate currently at 5.068%, which is below the overnight rate the Fed controls, which is at 5.25%. The latter rate is called the "Federal Funds" rate and represents the interest rate banks charge each other for overnight loans to each other. In fact, the 90-day Treasury Bill, which is substantially affected by Fed interest rate policy, is currently yielding 5.119%, a lower rate than the overnight rate. The free markets are speaking with one voice now and they are saying, "The Fed has gone too far in hiking short term rates."

Now, if the Feds raise rates again at the next meeting, will the markets change their mind about whether the Feds went too far? Not likely. The market is likely to react by lowering longer term rates to compensate for the increased probability that the Fed's error will help drive the economy closer to recession. If the Fed instead stands pat, they will have validated the "decision" of the market to lower long term rates. Either outcome is likely to be good for bonds, but if the Fed does raise rates, it would probably send the stock market plunging. We're not certain of that because the bond market would probably compensate by lowering long term rates and it's those rates which more directly affect the stock market. Thus, the plunge might be rather short-lived in stocks.

The only outcome which would be bad for the markets would be a lowering of rates by the Fed. The reason that would be bad is that it would send a signal that the Fed was very concerned about the economy slipping into recession. The bond market would take it as a sign the Fed wants to stimulate the economy and raise the inflation rate. The stock market would discount the lower earnings that come in a recession. We don't think the Fed is likely to lower rates next week.

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  # 11:40 PM