Flammable Vapors & Vioxx Fuse - Are You Listening?
Crude oil futures closed up more than $2 to $65.80 on Friday, but the rally in oil was overshadowed in the afternoon by the Merck/Vioxx verdict in Texas. Oil recovered more than half of the week's losses showing some considerable support at $63 per barrel. That support for higher oil prices is beginning to appear to be a real encounter with supply and demand issues. Media interviews frequently appear to build a case that $65 oil is due to speculative buying. This week however, Goldman Sachs raised its oil price forecast for 2006 to $68 per barrel saying that crude prices can hold at about $60 a barrel for several years to come because oil companies aren't investing enough in new supply. At some point energy users will get squeezed to the point that fuel charges must be passed along to ungrateful consumers.
The Vioxx verdict of $250 million for the plaintiff caused a late day sell-off in Merck of nearly 8%. The predictable follow-on selling of Merck on Monday could provide the source of ignition while steady-to-rising oil prices could provide some flammable vapors to deflate the Dow Industrials to the downside. The lackluster volume this week could "light up" next week. Look for some fireworks as some Wall Street vacationers might return prematurely to get their houses in order.
RISK ASSESSMENT: The downside market risk (probability of a sell-off) is dominated by geo-politics, oil and the vulnerable consumer. There is very little risk to our sell signal on the upside (probability of a huge rally - like capturing Bin Laden maybe?). We are pretty safe here with a Sell signal and a close cash stop.
TECHNICALS: The Nasdaq New Highs - New Lows chart below has rolled a little further south giving us some more evidence for a tech sell-off to lead the markets lower in weeks to come.
We have also included another chart of the Nasdaq Comp which gives another possible view of where signals might be taken. This daily chart includes a 200 and 10 day EMA to show where crossovers occur. The EMA crossovers are too late. However, take a look at the MACD histogram roll-downs and roll-ups and the "relative price to SPX" crossing indicators which have provided much timelier buy and sell signals in the last year. This chart has confirmed our sell signal in recent days. I have circled the appropriate buy and sell points.
3 Year Weekly - Nasdaq New Highs - New Lows
1 Year Daily Nasdaq Composite
Our Trading System - What The Numbers Are Telling Us
The equity markets have been in slow motion this week. The good news for our SELL signal is that even though oil prices ($WTIC) were off on the week, there appears to be no spark for a rally in stocks. We made some money this week (approx. 3%), but, more importantly, our model and decision support tools are strengthening the SELL signal. The daily NDX chart shows that we are now in a somewhat oversold condition. Normally this oversold condition would provide some support for a temporary rally. However, the media will be filled with Merck/Vioxx news next week which could blunt any rally as it did today. Next week is otherwise a slow economic news week.
Our chart model indicators on the NDX are gradually reinforcing the evidence for our Sell signal issued on August 8. The SlowSto, StochRSI, CCI and MACD histogram are now all on "sell".
We appear to be in late Quadrant 3 of this cycle where our weekly MACD histogram peaked and will now start to accelerate downward in Quadrant 4. Our proprietary adaptive MACD's have generated solid sells signals.
NDX - Expanded 6 Month Chart Model - Friday August 19, 2005
What About Bonds? The ten-year note yield barely budged on the week. The yield range is getting compressed. Which way will the spring recoil? An equity sell-off could lower yields somewhat. Sooner or later, the yields will move more dramatically.
What About Gold? - Gold mining stocks ($HUI) got roughed up a little this week by being off by about 4%. HUI didn't crater and having a higher low is some consolation for not having a higher high. The upward momentum has not been seriously violated, but we need a rally in the miners early next week or this recent uptrend my falter badly. This could be a good opportunity to gradually add to your trading position in NEM if a base is forming for the next wave up. Set close stops as a sell-off in the broader equities market could pull down gold mining stocks even if gold rallies. For short-term traders, the stop on NEM should be set at just below the low for this past week or about $39.40 (closing prices). This week NEM held above last week's stop of $38.50. Cross your fingers and hope that the current rally can take the miners higher. Admit failure quickly though if NEM breaks down below $39.40.
What Is The Current Market Sentiment?
This VIX continues to rise. The CBOE Total Put/Call ratio was down, well below rally-generating levels, but the 9 week EMA rose slightly. Though elevated, these 2 fear indicators are just high enough to be bearish factors without yet generating a fear extreme buy signal.
1 Year Weekly VIX
The Nasdaq Comp / SPX ratio has turned down after forming a third peak since January of 2004. Each successive peak was lower. The MACD of this chart has been a very reliable signal of market turns. The MACD is showing weakness at this point and any continued rollover will confirm the sell on all market indices.
6 Month - Weekly Nasdaq Comp. / SPX Ratio
The following ratio chart below looks at the two Rydex funds which we trade for our buy (RYVYX) and sell (RYVNX) signals. These two funds are leveraged for ± 200% of the NDX and therefore the ratio is sloped more dramatically. The daily delta between the funds helps highlight the market turns. The MACD histogram on this chart is showing a loss of technical strength at the recent July peak.
3 Year Weekly Rydex RYVYX / RYVNX Ratio
Where Do We Go From Here and How To Listen For the Next Signal?
The daily SPX chart is in oversold condition with the slow stochastic below 20 and turning up. The market could be setting up for a push higher. But our philosophy doesn't allow us to act on the "maybe" of next week. We simply need to stick with our sell signal and set our exit stop level above which we would declare a sell signal failure and exit to cash.
Our Fault Tolerant Cash Safety Stop (FTCSS) is a very important part of our successful model. It may be MORE important than our buy-sell signals!!! It is based on market volatility and is a close "trailing stop" which, if triggered, would alert us that the market has moved counter-trend with a tremor of sufficient magnitude that it might create a change in trend direction. It is very important that we know when to admit our signal is wrong or confusing and move to cash quickly. Our FTCSS calculator is telling us that our NDX Sell Stop should now be located at 27 points above the current price of NDX (1573.72 + 27 = 1601, Add 5 pts to get away from 1600 level). Therefore our FTCSS is 1606. If the NDX is looking like it is going to close above 1606 any day next week, go to CASH (buy Rydex Gov't. Money Market RYMXX) before the close.
Market Listener Trend Timing Signal Summary
Current Signal: 100% SELL (Bought RYVNX Rydex Venture 100 Fund)
Subscribers were advised by email of the SELL signal before the close on Monday Aug. 8.
Fault Tolerant Cash Safety Stop - For the Week of August 22, admit failure and exit to cash (RYMXX) on a daily close of NDX above 1606.
We will issue an email to subscribers next week if we get an exit signal or have a mid-week update necessary to change the FTCSS level.
The Market is whispering. Are you listening?
The Market Listener Indicators
(YTD Gain/Loss with RYVYX & RYVNX approx. +31.4 % as of Aug. 19 Close)
|Week Ending||Slo. Stoch.
|ML Signal 1|
|Aug 19, 2005||Sell||Sell||Buy||Sell||Sell|
|Aug 12, 2005||Buy-||Buy||Neutral||Sell||Sell|
|Apr 08, 2005
|Aug 04, 2005||Buy||Buy||Buy||Buy||Cash|
|July 29, 2005||Buy||Buy||Buy||Buy||Buy|
|July 22, 2005||Buy||Buy||Buy||Buy||Buy|
|July 15, 2005||Buy||Buy||Sell||Buy||Buy|
|July 08, 2005||Sell||Buy||Buy||Buy||Buy|
|July 01, 2005||Sell||Sell||Sell||Buy-||Cash|
|June 24, 2005||Sell||Sell||Sell||Buy-||Cash|
|June 17, 2005||Buy||Buy||Buy||Buy||Buy|
|June 10, 2005||Buy||Sell||Buy||Buy||Buy|
|June 03, 2005||Buy||Buy||Buy||Buy||Buy|
|May 27, 2005||Buy||Buy||Buy||Sell++||Buy|
|May 20, 2005||Buy||Buy||Buy||Sell++||Buy|
|May 13, 2005||Buy||Buy||Buy||Sell++||Buy|
|May 06, 2005||Buy||Buy||Buy||Sell+||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||Sell||Buy-||Sell|
|Jan 14, 2005||Sell||Sell||Sell||Buy||Sell|
|Jan 07, 2005||Buy||Sell||Sell||Buy||Sell|
|Dec 31, 2004||Buy||Buy||Sell||Buy||Cash|
Listen To What He Says
NAB 2 Corinthians 6:1 And working together with Him, we also urge you not to receive the grace of God in vain -- for He says, "AT THE ACCEPTABLE TIME I LISTENED TO YOU, AND ON THE DAY OF SALVATION I HELPED YOU." Behold, now is "THE ACCEPTABLE TIME," behold, now is "THE DAY OF SALVATION" --.
I am working on the art of listening and hope that you are also.