Micro vs. Macro Look at the Economy - Are You Listening?
The Business Cycle - Recycled - I received some emails regarding last week's report on my graphical look at the U.S. GDP numbers over the last 15 years and the current business cycle.
One subscriber forwarded a monthly report by a respected (but will remain unnamed) trader and financial advisor which indicates that his work shows that we are in the last portion of a trough in the business cycle. Presumably we would see a pickup in the business cycle from this point and an associated increase in GDP in the next few quarters.
Another emailer advised me that CSFB's forecast for the 3rd and 4th quarters of 2005 are for a 3.7% GDP growth rate. My response would be, "What did CSFB forecast for 1st quarter 2005?" I checked it out and their forecast was for 3.4%. It came in at 3.1%. Why would I trust CSFB to forecast 2 or 3 quarters into the future when they missed the near term quarter? If they were too optimistic in Q1, why should I not also expect them to be too optimistic in Q3 and Q4?
Now don't get me wrong. I think it is quite possible that what we are seeing in the current economic climate is a minor pullback. We may go on to see greater economic momentum in the next few quarters. But what I can say for certain is that, at this time, the 3-quarter moving average of GDP is down and we are definitely seeing a pull-back in economic growth. Where we go from here, no man knows. When I follow the market's trend I am never wrong. When I try to predict what color my socks will be tomorrow, I'm seldom right.
We will remain flexible, but with a downside risk bias knowing that there are large debt anomalies, derivative positions and other gremlins lurking in the shadows. The major risk to traders and short-term trend investors is not on the upside. It's on the downside.
The Fed - Micro vs. Macro Vision? - What was that statement revision all about? After the markets reacted negatively to the Fed's rate hike announcement on Tuesday, the Fed issued a press release stating that they "left out" a sentence on inflation which had been issued in several previous statements. Huh? What has this FOMC come to when these responsible adults cannot adequately express themselves in their statements without rubber-stamping words from previous meetings? Try using some words or phrases that we haven't heard before! Get real! Their late press release is surely evidence that the Fed is attempting to manipulate the markets. What is the Fed seeing with their microscopes? Why is it that they are wordsmithing instead of taking a "bigger picture" view of the macro economy and inflationary expectations? I believe they know that inflation is not a real concern as evidenced by their slight of hand tricks. While raising the short end rates to fight inflation at the front door, they are pumping up the M3 money supply in an inflationary way out the back door.
Either something is wrong with this economy, or, there is a much greater risk of deflation than is being acknowledged by the front men. I don't claim that I know where the imminent risks are to our economy or what the magnitude of those risks really are, but what I am very sure of is that I sense a contradiction in the Fed's policy. They are too manipulative and this week's revisionist editing of their FOMC statement confirms my suspicions.
Our Trading System - What The Numbers Are Telling Us
Our system is telling us plainly that we are seeing a contra-trend move beginning to develop. The Slow STO, StochRSI, and ROC indicators are all telling us to "Buy". Since these are our faster indicators, we must trust them to temporarily go to CASH from our sell signal. So we are issuing a CASH signal on Friday May 6 to go to money market funds while we wait for the market to work off the oversold condition or confirm a more substantial BUY signal. (Subscribers received the New Signal email before the close on Friday - Subscriptions are free. Send me an email with "Subscribe" in the Subject block - email@example.com )
Our MACD primary signal histogram is weakening for the second week in a row. If we get a histogram on the MACD that strengthens (down histogram bars getting shorter) 3 weeks in a row, we may issue a buy signal (the fast indicators must stay in "buy" agreement). We will only know near the end of next week. I have included a separate MACD histogram on the bottom of the chart below in the hope you can see it better.
For you chart lovers: Go to StockCharts.com and input the NDX to SPX ratio. (You would type it as; $ndx:$spx) Choose 3 years time frame and Period: Weekly, Style: Line and add a ZigZag (basic). Are we on the verge of a major buy signal such as we got in August 2004 and September 2002? Hang on to your hats.
NDX - 6 month Chart Model - Friday May 6, 2005
What Is The Current Sentiment?
In the past three weeks we have seen some sentiment indicators turn as bearish as we have seen since August 2004 and October 2002. This was a sure sign that a rally of some degree was at hand. The VIX had gotten too fearful. In addition, the Bullish Percent indicator for the NDX has been nearly as bearish as August 2004. The selling has subsided. My concern is that even though we had a great jobs number on Friday, the markets didn't really move out in a big way. Has the buying subsided also? The CBPE Put/Call ratio 8 DMA had moved above 1.0 and came back down to cross below the 18 DMA last week. This week, the 8 DMA rose again above the 18 DMA. Someone is buying lots of puts. Let's see if that condition remains next week.
Once again we seem to be at an inflection point where the market is weighing the all of the economic and business news, particularly the GM and Ford bond downgrade to junk status. This week bad news didn't matter. Will that sentiment continue?
3 Year Weekly Bullish Percent NDX Chart - $BPNDX
Looking at the chart above, we would NOT buy this market until the weekly BPNDX 8 EMA is crossed by the BPNDX itself. In this chart, it appears that it might take a couple of weeks to generate a buy signal were we to use this as our only signal indicator.
The VIX volatility index below shows that the fear of the last couple of weeks is fading away dramatically. A weekly VIX falling quickly from recent peak levels of 18 is surely a short-term buy signal. See the chart below.
The VIX will likely settle back into the 11-12 range and start to rise before we get another SELL signal. If it moves slowly into the 11-12 range, we may see a tradable BUY signal. If the market sells off next week, the VIX could once again start moving up and that would be a factor that could move us back into the SELL signal.
VIX Volatility Index - 12 months
The Nasdaq Summation Index (chart below) has reached very oversold levels and its Stochastic has been lurking at low levels not seen since June - September 2002. If the NSI starts a sustained upward move, it will be a short-term bullish signal. We are not there yet. Let's give it another week to see whether it starts the turn upward.
3 Year Weekly Nasdaq Summation Index
Where Do We Go From Here and How To Listen For the Next Signal?
We must go to cash for the next week and wait. The sentiment, VIX and fast indicators are all moving towards a buy signal. If this rally cycle is going to be more than just a couple of weeks, we will be able to profit from it by going to a buy signal in the next week or two. Be safe, relax, rest, go to cash and listen for the next signal.
Market Listener Trend Timing Summary
Current Signal: 100% CASH (Sell all RYVNX Buy RYMSS
The Market is changing directions now! Are you listening?
The Market Listener Indicators
|Week Ending||Slo. Stoch.||StochRSI||MACD||ROC||ML Signal1|
|May 06, 2005||Buy||Buy||Sell+||Buy||CASH|
|Apr 29, 2005||Sell||Sell||Sell||Sell||Sell|
|Apr 22, 2005||Sell||Sell||Sell||Sell||Sell|
|Apr 15, 2005||Sell||Sell||Sell||Sell||Sell|
|Apr 08, 2005||Sell||Sell+||Sell||Sell||Sell|
|Apr 01, 2005||Sell||Sell||Sell||Sell||Sell|
|Mar 24, 2005||Sell||Sell||Sell||Sell||Sell|
|Mar 18, 2005||Sell||Sell||Sell||Sell||Sell|
|Mar 11, 2005||Sell||Sell||Sell||Sell||Sell|
|Mar 04, 2005||Sell||Sell||Sell||Sell+||Sell|
|Feb 25, 2005||Sell||Sell||Sell||Sell||Sell|
|Feb 18, 2005||Sell||Sell||Sell||Sell||Sell|
|Feb 11, 2005||Sell||Sell||Sell||Sell||Sell|
|Feb 04, 2005||Sell||Cash||Sell||Sell||Cash|
|Jan 28, 2005||Sell||Sell||Sell||Sell||Sell|
|Jan 21, 2005||Sell||Sell||Buy-||Sell||Sell|
|Jan 14, 2005||Sell||Sell||Buy||Sell||Sell|
|Jan 07, 2005||Buy||Sell||Buy||Sell||Sell|
|Dec 31, 2004||Buy||Buy||Buy||Sell||Cash|
|Dec 23, 2004||Buy||Buy||Buy||Buy-||Buy|
|Dec 17, 2004||Buy||Buy||Buy||Buy||Buy|
|Dec 10, 2004||Buy||Buy||Buy||Buy||Buy|
|Dec 03, 2004||Buy||Buy||Buy||Buy||Buy|
|Nov 26, 2004||Buy||Buy||Buy||Buy-||Buy|
|Nov 19, 2004||Buy||Buy||Buy||Buy||Buy|
|Nov 12, 2004||Buy||Buy||Buy||Buy||Buy|
|Nov 05, 2004||Buy||Buy||Buy||Buy||Buy|
|Oct 29, 2004||Buy||Buy||Buy||Buy||Buy|
|Oct 22, 2004||Buy||Buy||Buy||Buy-||Buy|
|Oct 15, 2004||Buy||Buy||Buy||Buy-||Buy|
|Oct 08, 2004||Buy||Buy||Sell+||Buy||Buy|
|Oct 01, 2004||Buy||Buy||Sell+||Buy||Buy|
|Sep 24, 2004||Buy||Buy||Sell+||Buy-||Buy|
|Sep 17, 2004||Buy||Buy||Sell+||Buy||Buy|
|Sep 10, 2004||Buy||Buy||Sell||Buy||Buy|
1 This Market Listener signal is our base signal. Daily Money Management signals may move us partially and/or temporarily to cash. You should not base your trading on this or any other single indicator or set of indicators. With Rydex I can trade 10 minutes prior to the close during the trading day/week when I see that one or more of the fast signal indicators have changed signals. This is particularly important if I am going to a CASH position in order to preserve capital. The above table shows the results of the end-of-week, WEEKLY SIGNALS.
Listen To What He Says
From Exodus 33:12-17 (KJV): "And Moses said unto the LORD, See, thou sayest unto me, Bring up this people: and thou hast not let me know whom thou wilt send with me. Yet thou hast said, I know thee by name, and thou hast also found grace in my sight. Now therefore, I pray thee, if I have found grace in thy sight, shew me now thy way, that I may know thee, that I may find grace in thy sight: and consider that this nation is thy people.
And he said, My presence shall go with thee, and I will give thee rest.
And he said unto him, If thy presence go not with me, carry us not up hence. For wherein shall it be known here that I and thy people have found grace in thy sight? is it not in that thou goest with us? so shall we be separated, I and thy people, from all the people that are upon the face of the earth.
And the LORD said unto Moses, I will do this thing also that thou hast spoken: for thou hast found grace in my sight, and I know thee by name."
I am working on the art of listening and hope that you are too.