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March 04, 2006

"Easy" Money Button - Are You Listening?
by Greg Miller

Opening Whisper

I like the Staples commercials with their "Easy" button.

The FED seems to have touched their Easy Money Button with the data published on Thursday. That data for the M3 (20 Feb) showed that this measure of money supply was up 27.4% (season. adj.) This is the highest rate since 28.8% rate on Dec. 26, 2005. Are we seeing the FED starting to inflate the money supply as their data "disappears" from view on March 23?

Even with the money-pumper running at such a clip, the markets are continuing their range-limited movements. One way to see this is to review the monthly data chart using our weekly chart model parameters. As we move into early March, the candlestick bodies have narrowed. This compression will result in a definitive move out of the pennant-shaped range.

2 Year - Monthly Data - NDX Model

As you can see the monthly NDX chart (above) is overbought and even though there are other indications that the breakout could be to the upside.

The market is looking for direction and now seems to be pretty much in sync with the economic factors. I would call this a "compliant" market even though the economic future is littered with land mines. Bad news is not totally disregarded. Today's Intel warning hit the semiconductors modestly after a 3.7% rally on Wednesday.

With the M3 inflation rate at 27%, the FED may be worried about some things hidden from our view. The supply of dollars may find their way into the stock markets, but remember,..... they may also be directing that money to the Treasury market instead!!!!

The 10 year treasury note yield ($tnx) was up 46 basis points today (prices down) continuing a big rally of 117 basis points this week. This is the highest yield 4.68% since June '04. Stocks are apparently getting nervous that the party may be over for low interest rates on the long end.

Rising interest rates will not help the severely waning new home sales and could generate a more precipitous decline in consumer confidence as those adjustable rate mortgages kick-in to a higher gear.

Are the Japanese bailing out of the Yen carry trade where they borrow yen at zero interest rates and buy US bill/notes at 4.5-4.6%? Nice deal if you can get it. The possibly synchronized US-ECB-Japanese rate hikes may begin to eat into the free lunch in Japan. Japan's deflation fight may be over.

Strange things are happening around the world in terms of interest rates and an inflection point may be at hand. Rising long-end rates could hurt stocks as it draws market money away to those "safer" note/bond returns.

UBS sees the econ slowdown "slowing" and therefore has raised it 1 st quarter GDP to 4.4% from their prior estimate of 3.6%. That may imply that the FOMC continues in the rate raising routine.

The semiconductor index (SMH) rose 2.68% on the week, but could not close above the high of last week and therefore doesn't give us a break-out rosy picture for the NDX.

The Bank index ($BKX) was down 1.57% for the week and may be telling us that there is interest rate dangers around the next curve in the financial road. Bell-weather GE was down fractionally (-0.24%) on the week. The GE chart (below) doesn't look good.

6 Month - Weekly Data - GE

Our Market Model

6 Month NDX Chart Model

Referring to our weekly chart model, last week I suggested "The chart technicals are beginning to look a lot like October of 2005 when the year-end rally began." However, the buy incentive may be simply a trap for the bulls. Interest rates may be ruling the financial landscape and any buy signal here would not have the benefit of coming off of extremely oversold.

Trend Compliance

The NASI is still "trend-challenged" and directionless.

6 Month Nasdaq Summation Index ($NYSI)

Ditto from last week; This chart confirms our belief that we are in a consolidation and trend-less phase. The next trend must be significant to entice us to follow it. Within such a flat market environment, the possibility of reversals is high even when a technical indicator crossing signal occurs.

Sentiment

Sentiment is bullish, but not at any extreme where signal turns occur.

This market is very volatile and dangerous for both bulls and bears. Dollar is at risk. Gold and oil may be ready to move back significantly to the upside in a rising rate, hard-money and value-"less" dollar environment.

Let's review our conclusions below.

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Conclusions

Let's wrap it up this way - Consolidation, Trend-less and Dangerous;

Very Short-term (3-10 days) - Econ data next week includes factory orders and the monthly Labor Dept. jobs data. The market direction is likely to be determined by the 10 year note yield moves. It's a day-trading, not trend trading environment.
Intermediate-term (30-90 days) - A significant move is coming. Possibly looking at a short term rise from which all indices will be sold. We are not anywhere near sentiment extremes where our best signals are taken.
Long-term (6-18 months) - Flat to lower. Vulnerable to geo-politics including Iran's oil bourse, oil prices, N. Korea, Avian Flu, diminished dollar and possible Asian refusal to buy US Treasuries. My gut says we will be much lower in October 2006 than we are at this moment.

Listen To What He Says

NAB Luke 4:3-8 And He got into one of the boats, which was Simon's, and asked him to put out a little way from the land. And He sat down and began teaching the people from the boat. When He had finished speaking, He said to Simon, "Put out into the deep water and let down your nets for a catch."

Simon answered and said, "Master, we worked hard all night and caught nothing, but I will do as You say and let down the nets. When they had done this, they enclosed a great quantity of fish, and their nets began to break; so they signaled to their partners in the other boat for them to come and help them. And they came and filled both of the boats, so that they began to sink.

I am working on the art of listening and hope that you are also.

Best Profits,

Gregory W. Miller, P.E.
The Market Listener
An Educational Newsletter for Stock Market Trend Timers

Paid Subscribers receive mid-week alerts to market changes that impact our system. The alerts advise of changes in stop level or signal changes prior to the Friday close of trading.

The Market Listener Trading System - My adaptive trend following trading system is the result of years of mistakes. I always seemed to be zigging when I should be zagging. My investing was based too much on emotion and inputs from so many varied newsletters and methods. After what has been literally years of personal research into cycles, Elliott Waves, artificial intelligence and many other systems, I have learned that my own trading style is best handled by avoiding the "art" of prediction at all costs!!! When I looked at moving averages for indication of trend direction, it seemed that they too were always 180 degrees out of phase with what I should have done. My conclusion, after many losses and much frustration, is that I needed to keep it very simple and let the market tell me what it wanted to do. In particular, I wanted to follow the trend, which is your friend, until the market whispered, or shouted to me that it wanted to change directions. And then, I found that Stochastics and Rate of Change indicators help me go to cash until the trend reverses or continues. Thats how my trend following system & its cash management component developed. I trade Rydex Venture and Velocity funds by which I can go short (x2) or long (x2) the NDX (NASDAQ 100 Index). I hope my newsletter and its insights can give you an education on alternative investment strategies. You might find your own technique or modify mine.

Links:
Rydex Funds: www.RydexFunds.com
Stock Charts: www.StockCharts.com

About the Author: Gregory Miller is a registered Professional Engineer (PE) in the State of Texas. He has been involved in electrical engineering and projects in the U.S. and some far-flung regions of the world. Greg has studied the markets for decades and enjoys applying his analytical abilities and computer number crunching to the science of investing.