Market Clues

Sentiment studies have been very mixed lately. Our own dollar-weighted ratio for the OEX registered an overly-bullish reading on Wednesday. That signals a trading top within 2-3 days. However, QQQ traders were (and are) quite bearish, with Thursday's reading almost to the overly-bearish level. Perhaps we should call these readings overly-confused?

Another sentiment reading from Jake Bernstein is said to be showing over 90% bulls, the highest since just before the 2001 meltdown in the market.

The anecdotal evidence says the crowd is bullish. CNBC's best reporter, Bob Pisani, reported that of the trading desks he had informally surveyed, approximately 95% were bullish on stocks. That's far too many bulls to produce a good rally because if these traders are bullish, they have already bought. Even if the remaining 5% turn bullish and buy, how far can they push the market up?

In any case, the stock market has been trying mightily to get the Dow Industrials to a new high. Day after day, the media urges the market on. And, the Republicans do, too, since a new all-time high in the stock market is sure to buoy sentiment ahead of the November Congressional Elections and help erase some of the bad feelings voters harbor toward the situation in the Middle East. We would be very surprised if the Dow doesn't score a new all-time high in the next day or two.

Unfortunately, new highs in the stock market are only going to marginally help the economy, which is sinking slowly in the West. GDP figures show that growth has plummeted by 50% over the last six months. At that rate of descent, the economy's growth rate will turn negative by early 2007, not late 2007 as we had been suggesting -- that is, barring a Fed rate cut to add to the rate cut already engineered by the bond market rally. When investors start discounting the probability of lower earnings from the recession, they might decide to sell. If they do so at once, we just might get a decline very similar to the May debacle, bearish sentiment or not.

Friday is the last day of the third quarter and the closing values of stocks will appear on money manager report cards for the quarter. It is in their best interest that those prices be as high as possible. Last year, the third quarter ended on a rally which gave way to a steep corrective decline starting on the first trading day of October. History may very well repeat that pattern this year.

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

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posted by Bob Carver  # 11:12 PM

Sometimes certain phrases stick in your mind and this market reminds us of a favorite phrase of an investor/trader we knew many years ago. This investor had been a Texas rancher before trading his Stetson for the comfort of an air-conditioned Fidelity trading office. We could always tell when the market was ripe for a correction, or worse, when we walked into the office, asked him how the market was doing and he replied, "They've rounded up the cattle and put them in the corral." The meaning was unmistakable: the insiders had finally convinced the public to buy shares. Needless to say, the free lunch the public thought they were getting was going to be on them -- literally!

You see, when cattle are prepared for slaughter, they are put in a corral in a feedlot and fattened up to put extra pounds on so they will bring extra profits.

We can just hear that old rancher saying, "They're going to be ready for slaughter any day now!"

The market struggled to make gains on Wednesday. The media circus put on by CNBC was reminiscent of past circuses, like NASDAQ 5000 -- now at less than half that figure. With all the focus on a specific figure -- Dow 11,722 this time around -- one can only hope they get their wish before the cattle are fat enough to slaughter.

We're now nearing the end of the quarterly Window Dressing period when money managers pump up prices to make it look like they did a better job at making money than they really did. Yes, some of those cattle are looking nice and plump now!

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  # 11:44 PM

The big bond rally of the last few days paused for profit-taking Tuesday and it appeared that some of those profits found their way into the stock market.

Signs of a slowing economy have propelled bonds higher (interest rates lower) since late June in a substantial retracement of the interest rate rise of the first half of 2006. In fact, the bond market has not only neutralized the Fed's rate hikes, they have rolled back interest rates to levels which may be very stimulative to the housing sector, the sector which has provided virtually all of the job growth in the country over the past five years.

But, while the big blue chip stocks are benefitting from the infusion of cash, the broad market is beginning to slow down, suggesting that the transition to a blue-chip led market is underway. That kind of gear-shifting usually occurs in the middle of a long term uptrend. A similar shift occured in 1994, coincidentally a time when the Federal Reserve engineered its first "soft landing" -- a slowdown in growth rates and inflation which did not result in an outright recession, or "hard landing." Can they do it again?

If they do not, stocks may be in for a very rough ride. If they do, the bond market could be taking some severe heat.

In any case, we discuss an investment strategy today that is designed to profit from this shift in stock market leadership. One of the biggest advantages of the strategy is that it doesn't depend in the least on getting the direction of the market right -- it can generate profits in up, down and sideways markets. And, it offers an 80% reduction in margin requirements to boot. It is, in fact, the most margin efficient way to invest. It's a strategy very few investors have even heard about, but those who use it claim it beats all the rest.

Subscribers can read about it in today's notes, 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  # 12:24 AM

Sentiment toward the stock market is now at levels last reached four years ago, at the beginning of the last bull market. Bernie Shaeffer reported Monday that the NYSE options unit reported that investors had reached current levels of bearishness only one time before, right at the bull market bottom in late 2002 (not coincidentally, the last 4-year cycle low in stocks).

Our measures of sentiment are showing similar, but not so extreme, levels of bearishness toward stocks. On Monday, OEX and QQQ option speculators poured almost twice as much money into put options as calls even as the market soared. This contrary indicator is basically saying the rally which started in June has legs.

Although there is definitely a thinning out of the list of advancing stocks, the blue chip stock indices are leading the advance. Over the last four years, the broad market has led the way higher, confirming the strength of the bull market. Now, that leadership is changing, being passed to the blue chips. The last time the market transitioned from a broad market led advance to one led by the blue chips was in 1994. The S&P 500 Index then gained 243% over the next four years.

That was, of course, a once-in-a-lifetime bull market. And, it was a Bubble which burst, eventually. But, it does show the power of a new bull market to create enormous wealth. The typical bull market arising from a four-year cycle low historically has seen an advance of 50%.

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  # 9:44 PM

Although the market failed to rally Friday, market sentiment proved that the rally is likely to resume shortly. Bears were coming out of the woodwork to declare that stocks had made a top. Like Chicken Little, these ever-wrong criers of doom and gloom can be counted on to run for cover at the slightest hint of bad news. And that's actually a good thing for it means that the stock market has further gains ahead of it.

You see, the stock market can continue to climb due to these worriers. They have already sold their stocks and will be forced to become buyers when those stocks move higher. This will give the market the buying power to make higher highs in the near future.

We would definitely start to worry if these ever-wrong traders were actually buying dips, however. So far, that's not the case and we are confident that the market will continue to make new highs in the near future. Unfortunately, we are much closer to the end of this long rally than to the beginning, but that's no reason to give up on the rally prematurely.

Remember, tops are long, drawn-out affairs because it takes an overwhelming amount of bad news to stop the underlying uptrend, but bottoms are very quickly made as the last seller has sold and there is no one left to sell. The opposite holds at tops: the last buyer has bought and there is no one left to buy. Right now, it's clear that we will need to see the current ample crop of sellers become buyers before there is any chance that a top is in.

While that's true for the broad market, one leading sector has already topped. Subscribers can find out what that sector is and what kind of information that fact gives us about when the broad market will reach its top by following the link below.

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

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posted by Bob Carver  # 1:27 AM

The self-serving news media will tell you the market declined on, what else?, news on Thursday. But, of course, we know better. It declined because it was time for it to decline.

Profits were taken and the indices cruised lower.

The big story was that bonds went up -- and up sharply on Thursday. When bonds go up in price, that means interest rates are going down. Forget the Fed. They are dedicated followers of bond fashion. When the bond market dictates that long term interest rates will henceforth move in a certain direction, the Fed cannot play a game of Chicken with the market: it knows it will lose.

Now, usually stocks will move with bonds. So for stocks to go down in the face of falling rates is not something that can last a long time. Lower rates mean that stocks become relatively more attractive than bonds. In fact, with money market accounts paying 5% nowadays, buying bonds that will only ever yield 4¾% over their entire multi-year lifetime seems a bit daft, but that's the way it is in bondland. Note that stocks yield north of 10% per year over the long haul (even more in the small-cap arena). Obviously, the bond market is exhibiting what former Fed head Alan Greenspan called "irrational exuberance." And that suggests that a major buying opportunity in the stock market is coming.

Timing that move correctly will represent an even better buying opportunity, of course.

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

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posted by Bob Carver  # 11:19 PM

In Wednesday's market, the Federal Open Market Committee decided to keep short term interest rates unchanged. While most observers think the Federal Reserve "controls" interest rates, they actually control only the very short rates, the "Fed Funds" rate banks charge each other for overnight loans being one of them. Long term rates are entirely controlled by the bond market. If the bond market wants to keep long term rates relatively low compared to the overnight rate the Fed controls, there's nothing the Federal Reserve can reasonably do to prevent it.

The Fed has its hands tied by the bond market right now. Bonds decided at the end of June to lower long term rates even as the Fed was raising the overnight rate to 5.25%. And, indeed, the 10-year Treasury Note stands today almost a half-percentage point under that unchanged FOMC-controlled rate. That's called an inverted yield curve -- a situation which has always led in the past to the onset of a recession when conditions were the same as they are today.

Until the bond market either raises rates or the Fed lowers them, we will continue to see this inverted yield curve. Many economists are claiming it's different this time. The inverted yield curve is not signaling a recession ahead. Unfortunately, the last time the yield curve inverted was at the beginning of the early 'Naughties recession -- and they claimed things were different then. But, things weren't different and we got a nasty recession which required the Fed to lower short term rates to depression-era levels to bring the economy back to life after the NASDAQ stock market lost 80% of its value and the S&P 500 index lost 50%. One thing we know is that economists can be counted on to be wrong at critical turning points in the economy. Why that is must be one of the mysteries of human nature.

But, it isn't too late for the Fed to wake up and lower rates. It's also possible the bond market will raise rates to un-invert the curve. The signal for a recession will be given by mid-October if the curve stays inverted.

The stock market rallied right up to a resistance line Wednesday and backed off although maintaining a decent gain for the day. Was that the top? We'll discuss that in tonight's notes, linked below.

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

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posted by Bob Carver  # 10:06 PM

The current minor correction in stocks only retraced about half of the preceding rally, but it did illustrate that the final top in this bear market rally has not yet been seen. That is, if option trader sentiment is any guide. Both OEX and QQQ traders went heavily into puts on the dip, a far cry from what we expect to see after the rally is finished.

The market rebounded nicely from the dip toward the close and it appears that the swoon was more of a bear trap than anything. Money flow showed that buyers were accumulating positions on the dip. This Venus-flytrap closed on the unwitting sellers late in the afternoon, leaving the indices virtually unchanged for the day.

The forecast for a geomagnetic storm over the weekend and early this week was accurate. It wasn't a strong storm, but now that it's subsiding, the market can get back on track for the rest of the week.

The FOMC (the committee which sets very short term interest rate policy for the Federal Reserve) will announce its latest decision Wednesday afternoon. It is expected that the decision will be to leave policy unchanged.

We are now in the time of year we have pointed to for several months as the likely topping timeframe for the rebound rally and the beginning of the seasonal swoon. We'll examine several indicators for subscribers today to see what they are saying on the topic (see 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  # 10:50 PM

The markets were flat Monday as selloffs were greeted by buying support near the lows.

Sometimes you just have to wonder exactly what it takes to be a hedge fund manager. One of the elementary principles of investing says very simply, "Cut losses short." What this means is to make sure that you don't lose more than a certain amount of money in a position. The way that is accomplished is preferably through the use of a money management stop loss order. That lesson should be taught in Hedge Fund Management 101. The first week of class.

On Monday, a hedge fund named Amaranth, which started the month of September up a respectable 22% for the year to date, reported to shareholders that it was now 35% in the red for the year! Apparently, they had bet big on Natural Gas and were reluctant, or forgot, to set stop loss orders on their position. Now, if you've ever had that experience, you won't have to feel like such a newbie investor. This was a $9 Billion hedge fund, which is now a $6 Billion hedge fund.

The lesson for today is: always use a money management stop on traditional positions (Scale Trades excepted, of course). That means to determine the maximum percentage of your portfolio you are willing to lose and set the stop so that you won't lose more than that maximum. Now, do your homework and you may be a hedge fund manager someday!

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  # 10:26 PM

After several months of extreme bearish readings on sentiment, the crowd of option traders has finally thrown in the towel and turned extremely bullish. On Friday, OEX traders eagerly bought calls, bets that the market would soar -- $2.30 went into calls for every dollar of puts. Apparently, a rally which took the Dow from a July low of 10,638 to 11,613 (a 930-point rally) was necessary to convince the short term thinkers that the trend was up.

Will it continue? Yes, but it won't be a straight up bull market and the market has to convince these newly-converted bulls that it won't rise before very much more headway can be made to the upside. That's because a bull market rises against a "Wall of Worry" which convinces most investors to sit on the sidelines (or sell rallies short as the crowd has been doing in recent months). That the rally has benefitted from the shorts being forced to buy is one of the market's most delicious ironies. But, that's exactly how the market behaves.

This weekend we'll discuss the next year in stocks and how the new bull market is likely to produce huge returns for investors. The first year of a new bull market always provides the highest returns of all; missing out on this phase (which most investors do) is likely to be extremely disappointing. Once the crowd realizes it's a new bull market, the Point of Recognition will be reached and investors will have to pay up substantially.

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

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posted by Bob Carver  # 2:41 AM

What was last is now first. The tech sector had been in the dumps all year -- until August 8th, in fact. Since August 8th, stocks in the NASDAQ-100 have outperformed the rest of the market. Just what does this mean?

Well, if history rhymes (remember, it doesn't have to repeat exactly), this means that a brand new bull market is going to carry the market much higher in the months ahead. For instance, at the last 4-year cycle low in 2002, the NASDAQ-100 Index showed excellent relative strength at the October bottom and continued to lead the market up the hill for the next year.

Going back even further to the major bear market low of August 1982 in the blue chips shows that the tech sector had bottomed 9 months prior and had been making higher highs and higher lows -- the very definition of an uptrend -- while the rest of the market was having trouble keeping its head above water.

So, while strength in the tech sector doesn't mean the whole market is out of the woods, it does say that with a bit more patience, we are going to see the "Sweet Spot" where the bull market accelerates sharply higher.

Today, we have a very specific resistance point to watch in Friday's market. If the market turns down from that resistance, a correction will be underway. If it is able to rally above it, though, we could be off to the races on the upside. Details will be found, as usual, by following the link below.

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

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posted by Bob Carver  # 10:10 PM

Since the market correction started in May, investors have been worried about a myriad of problems. After the initial three-legged decline (a typical Elliott Wave A-B-C pattern usually seen in a correction), we have had a rally since July against this Wall of Worry.

We are now seeing that Wall of Worry beginning to crumble. While that is a positive for stocks -- it causes investors who had fled to the sidelines and money market accounts to start buying again -- it suggests that a great deal of faith is being put in the ability of the economy to avoid a serious economic slowdown next year.

It's unlikely that the Rosy Scenario will pan out exactly as the crowd thinks. Oh, we think the economy will avoid a recession, probably after the Fed comes to its senses and starts easing rates, but there are likely to be many potholes in the road.

This Friday morning we will be seeing some significant news on Consumer Prices and it will be instructive to see how the markets react to this data. That will also mark the day options and futures for September expire, a day called Quadruple Witching Day. The news is likely to add to the volatility substantially.

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  # 11:25 PM

The market rallied sharply higher after trade flows and earnings news indicated the consumer was strong. Despite ample evidence of a slowing economy, investors have chosen to assume that the strong consumer will lift the economy and avoid a dip into outright recession caused by an overactive Federal Reserve interest-rate tightening campaign. In fact, inflation fears at the Fed, which have been caused by the housing bubble and rising energy and other commodity prices, are dying out. These positives should persuade the Fed to, at the very least, keep rates steady, or even lower them early next year. At the present time, one of the larger forces pushing inflation higher are those rate rises themselves as they increase the cost of business borrowing, which increases end product prices when those businesses are able to pass those extra costs on to the end user. A pause here on the part of the Fed would not only allow the central bankers to observe the effects of prior rate rises, but also remove their own, self-induced, source of inflationary pressure in the economy. The stock market is happy with Rosy Scenario.

The bond market, however, is reluctant to resume its rally, no doubt for some of the same reasons which buoyed stocks. Despite the reluctance, a good government bond auction eventually lifted bonds off the lows of the day for them to close with a modest gain.

This is Quadruple-Witching expiration week. Normally, the market will settle into a tight range going into expiration Friday, so we may see some consolidation of the rally as we head toward 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).

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  # 10:49 PM

Semiconductor stocks caught a bid Monday as Freescale Semi disclosed it was in discussions with several private equity funds to take the company private for about $16 Billion. Investors reasoned that prices of semiconductor stocks were undervalued (they are) and bid the group up.

They are right, of course. The SOX Index formed a new Magic-T centerpost recently and projects an ongoing trend to the upside (bull market) well into next year as the market finally recognizes the growth potential of the sector.

Despite the trend to the upside, no market goes up without pullbacks. In today's Subscriber Notes we discuss some dates which we reckon will bring the best buying opportunity we're likely to encounter for the rest of this decade. In other words, the decline is coming and we have a pretty good idea of just when it will happen.

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  # 11:01 PM

The correction we expected in the stock market last week came right on schedule, but failed to generate more than a couple of days of decline, about on par with other corrections in an ongoing uptrend. Will the correction continue, or will stocks once again start climbing the Wall of Worry? Subscribers can examine our technical outlook by following the Subscriber Notes link below.

In terms of sentiment, each decline has seen short term option traders load up on puts. While this behavior continues, we think it unlikely that a severe decline in the stock market can last long or carry far.

We also note that as long as bond rates are trending lower, this is a support for higher stock prices, as well as stimulative to the housing market due to lower mortgage interest rates. The bond market is leading the Fed and counteracting their attempts to tighten liquidity. We will discuss a specific roadmap for bonds which will affect stocks and lead to that selloff so many of the short term bears have been looking for. We will also discuss some specific timeframes both for that selloff and for a great buying opportunity upcoming in the next few months.

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  # 1:20 AM

The correction which started following the geomagnetic storm* last weekend seems to be taking on a familiar pattern; namely, the bears get excited and sell the market down, it finds support and the sellers back away. Clearly, there's little impetus to the downside and that's a longer term bullish sign.

Another bullish sign is the fact that bonds are continuing to see great buying support on the correction. The last bond market high occured with bonds extremely overbought, having rallied since late June and needing a pause to refresh. Profits have been taken and investors are finding bonds very attractive, even at levels below 5%. Thus, bonds are likely to continue their rally and that will help support the stock market.

Finally, the extremely bearish sentiment figures in the stock market tell us that the crowd is still bearishly biased even after two months of rally. That's pretty amazing when you think that after all this time, the average trader is still selling short -- and having to cover when the market rudely rallies and hits their stops!

*A study by the US Federal Reserve found a close correlation between geomagnetic storms and subsequent corrections in the stock market. "Geomagnetic solar storms occur approximately 35 days per year. For their study, Krivelyova and Robotti [the Fed researchers] correlated the dates of all such storms over the past 70 years with the behavior of 12 of the world's stock markets over the same period. An unmistakable pattern emerged: When the sun flares up, the markets go down. The condition lasts for about six days after the storms end."

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  # 10:54 PM

The stock market finally realized that it was time to do some profit-taking and tumbled back to the support areas formed last week. The bond market had been in a correction since Friday's unsurprisingly tame Employment Report. It was about time that stocks realized that one of their main supports -- falling interest rates -- weren't falling anymore!

The reaction of the crowd to the dip was revealing. While some are calling a major top in stocks -- for instance, Walt Bressert, considered by many to be the original cycles guru, sent out an email this morning which declared the 36-year cycle had double topped and the "THE BULL IS DEAD" -- the crowd certainly must be agreeing with these warnings. We can tell because both the OEX and the QQQ option traders poured exactly twice as much money into put options (which rise when the market crashes) as call options. Clearly, the crowd is likely to be disappointed once again. If the market just noodles around for a little while, those expensive puts are going to lose most of their time value. We'll worry when the crowd is eager to spend twice as much money on calls on dips! As a matter of fact, that's exactly what the crowd did at the 2000 top.

Tops, even the relatively minor top we've been expecting to develop now, take time to build and those put options aren't likely to pay off with a big jackpot, especially when the majority is heavily buying them. The market is just perverse enough to move sideways, destroy the time value of those puts, let them expire worthless, then make its big move to the downside. That's why we generally think that shorting puts and calls is a much more profitable game for those so inclined to play in the options "street".

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posted by Bob Carver  # 9:44 PM

The August doldrums continued to dog the US stock market Tuesday and kept it mired within a narrow range. Most foreign markets saw gains on Monday, but many rallies met stiff resistance on Tuesday.

The stock market has been strong in recent days. Much of that strength can be attributed to two factors:

1. an extremely oversold condition;

2. a bond market rally which reduced long term interest rates by almost ½%.

On Friday, the bond market's reaction to the as-expected Employment Report was less than bullish. Weakness continued on Tuesday as the bond market gave back all of its gains since August 28th. This undoubtedly was a negative for the stock market. With the oversold condition unwound and the bond market relatively weak, the stock market's condition is growing more and more vulnerable in this, the worst month for stocks.

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  # 10:09 PM

Stock prices rallied sharply higher Friday after the August Employment Report showed the rate of new job creation continues to be poor. The Labor Dept reported that 128,000 new jobs were created. However, they only received data which indicated that 7,000 new jobs were created and assumed that there were 121,000 missing jobs which did not get counted -- rather a large error bar even for the government.

The real unemployment rate declined from 8.5% to 8.4% from July to August, while the headline number reported by the media declined from 4.8% to 4.7%. The former figures are comparable to historical rates of unemployment before the government decided to exclude several million unemployed for various flimsy and quite transparent reasons under the Clinton Administration. The 8.4% rate reflects the fact that the economy has been under pressure from off-shoring of jobs from the US to developing Asian countries. Those lost have left the US forever, but the government fools most of the people most of the time by simply excluding some willing workers from the reported figure -- and the lap-dog journalists are only too happy to "play along" with the bureaucrats in this little game.

The stock market is also willing to play along with the bond market in thinking that the currently weak indicators pointing toward a recession in the near future are wrong this time. There is a risk that the inverted yield curve will be just as accurate in forecasting a recession for 2007 as it has been in historical terms. Another chart which has been bandied about on the Internet shows that moves in the stock market have a 79% historical correlation to moves in housing -- and housing has been dropping off a cliff. If this indicator is correct, the stock market is about to crash. It has been reported that housing provides one-third of all jobs in the country and a severe depression in housing is certainly going to put a lot of pressure on the US economy, which is driven by the consumer.

We'll examine that question this week for subscribers who click on 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  # 11:39 PM