Trend Watch

By: Wealth Anchor | Thu, Oct 6, 2005
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Terminology

For those who are first time reading Trend Watch, please click here to understand the term definition and/or how to interpret it.

Part I - Market Comments

The market went flat in the first half of the week but rallied surprisingly on Thursday and gained a little more on Friday. For the week, the Dow Jones Industrial Average and S&P 500 respectively gained 1.4% and 1.1%. The Nasdaq Composite did even better, finishing 1.7% higher.

We did expect a little bit of upward counter-trend correction mentioned in the last weekly update. Since Thursday and Friday were the last trading days for Q3 2005, we somewhat suspected that the typical "window dressing" phenomenon might contribute something to the late-week rally. But that's just our little guess and the market couldn't care less about it.

Of course, we shouldn't be too happy seeing that the market went up. Our system view is bearish and the short- and intermediate-term signals are all SELL. That means the signals are temporarily yielding a very small paper loss. The real question we are asking ourselves now is -- was the last week a good opportunity to add more short position to portfolio or a possible on-going trend reversal session?

In short, our system remained a very steady state for its SELL signals. All the SELL signals have locked and stayed in locked phase as of last Friday. There is no doubt that the last week's surprising rally is a counter-trend correction from the WATTS's point of view. It also matched the typical behavior that we mentioned in the last weekly update -- a modest to strong upward correction usually occurs at the initial stage of a coming long and strong downtrend.

In addition to the above 2 reasons, the intermediate-term WATTS signals reinforce the bearish scenario. As a matter of fact, the intermediate-term WATTS system has stayed in SELL signals since it detected an intermediate-term trend reversal on 8/18/05. It never came any close to issuing any new trend reversal up signals since. Taking that as the backdrop of our system view and considering the short-term signal readings are moving lower and lower, it's pretty obvious that the market was in a downtrend since August. In retrospect, the September's rally was just a short-lived counter-trend correction and nothing more.

The current market situation is very similar to what happened in Q1 this year in terms of WATTS system pattern and the market price action. An initial drop in Jan. and then a rapid upward correction followed in Feb. After the final bounce in early March, the market lost its ground and fell down significantly.

We experienced a similar initial drop in August and then just like the Q1 case, a rapid and surprising upward correction followed in Sep. The Feb's counter-trend correction comprised an initial bounce and a final upside attack before it gave up. Turning to Sep., we did have an initial bounce and now may be having the final upside attack. It surely looks like a deja vu of the Q1 market story.

We are not saying this just because the market movements looked alike. From the system pattern of WATTS, we saw the exactly same things in those 2 cases. The evidence is that the initial bounce could trigger a trend reversal up signal in WATTS but the final upside attack couldn't in both cases.

The devil is always in the detail. Let's look into the system pattern deeper. The short-term trend reversal up signals triggered by the initial bounce were both weak and short-lived, and even the duration were in the same ballpark. And the later second bounce totally lost the ability of deceiving our system. WATTS didn't budge at all with the final upside attack. In both cases, while the market continued to pull off it second attack to the upside trying to deceive as many investors as it could, WATTS simply just stayed clam and didn't even bother to unlock its downtrend signal. In other words, although the market was rallying, WATTS was telling us that the down trend is still in tact and in its full force.

Besides, the market breath is getting poorer and poorer since July. The chart below is a market breath indicator. It measures the total number of the stocks remaining above its 50-day moving average in the Nasdaq Composite. For example, if there are 1,000 stocks that are above its 50-day moving average and 500 stocks that are not, the reading of this indicator would be +500. The technical analysts usually regard it as a good sign that a stock can remain above its 50-day moving average and a bad sign if a stock can't manage to do so.

Obviously, the total number of the stocks above 50-day moving average is in a downward channel since July. That means fewer and fewer stocks are joining the market rally. From a market breath point of view, it's a bad omen to the future. The market is not as healthy as it used to be, though it still looks good from appearance.

We don't like the market rally last week but we do like to see what happened with WATTS during the same time. We'll hold this solid bearish system view until the market can move the WATTS signal readings.

Part II - Signal Update

WATTS Short-term Signal Status

Index Signal Type Issued Date Closing Price
When Issued
Closing Price
Last Friday
Hypothetical
Return*
NASDAQ SELL 9/19/2005 2145.26 2151.69 -0.30%
S&P 500 SELL 9/19/2005 1231.02 1228.81 +0.18%

Last Closed Short-term Signal

Index Signal Type Issued Date Closing Price
When Issued
Closing Price When
Liquidate (9/19/05)
Hypothetical
Return*
NASDAQ BUY 9/1/2005 2147.90 2145.26 -0.12%
S&P 500 BUY 9/1/2005 1221.59 1231.02 +0.77%

WATTS Intermediate-term Signal Status

Index Signal Type Issued Date Closing Price
When Issued
Closing Price
Last Friday
Hypothetical
Return*
NASDAQ SELL 8/18/2005 2136.08 2151.69 -0.73%
S&P 500 SELL 8/18/2005 1219.02 1228.81 -0.80%

Last Closed Intermediate-term Signal

Index Signal Type Issued Date Closing Price
When Issued
Closing Price When
Liquidate (8/18/05)
Hypothetical
Return*
NASDAQ BUY 5/27/2005 2075.73 2133.08 +2.76%
S&P 500 BUY 5/27/2005 1198.78 1219.02 +1.69%

WATTS Bottoming Zone Alert

Index Current Signal Issued Date Last Signal Issued Date
NASDAQ None None Level-I Alert 4/15/2005

Part III - Model Portfolio Update

Model Portfolio provides investor who doesn't know how to react to the WATTS's signal a simple guideline of how to manage his/her portfolio. If you are interested in following this guideline table, please Read This Important Note first.

Model Signal Account Type Equity Type Most Aggressive Portfolio Least Aggressive Portfolio
WATTS Short-term Signal Stock Trading Account (Margin Account) Stock & ETF 50% QQQQ short,
50% cash
0% SPY, 100% Cash
Mutual Fund None None
Stock Trading Account (Non Margin Account)Self-managed Retirement Accounts (IRAs, 403b...) Stock & ETF 0% QQQQ long,
50% Cash
0% SPY, 100% Cash
Mutual Fund 50% POTSX None
Company-managed Retirement Account (401k) Stock & ETF Not Available Not Available
Mutual Fund 50% POTSX, 0% High-growth Fund, 50% Money Market or Short-term Bond Fund 0% High-growth Fund, 0% Balanced Fund, 100% Money Market or Short-term Bond Fund
WATTS Intermediate-term Signal Stock Trading Account (Margin Account) Stock & ETF 0% QQQQ, 100% Cash 0% QQQQ, 0% SPY, 100% Cash
Mutual Fund None None
Stock Trading Account (Non Margin Account)Self-managed Retirement Accounts (IRAs, 403b...) Stock & ETF 0% QQQQ, 100% Cash 0% QQQQ, 0% SPY, 100% Cash
Mutual Fund None None
Company-managed Retirement Account (401k) Stock & ETF Not Available Not Available
Mutual Fund 0% High-growth US Stock Fund, 100% Short-term Bond Fund or Money Market 0% High-growth US Stock Fund, 100% Short-term Bond Fund or Money Market

PART IV - Optional Reading Material

1. Money, the markets and the facts: http://www.marketwatch.com/news/story.asp?dist=morenews&param=archive&siteid=mktw&guid=%7B80EB2EFB%2DE8FF%2D4818%2DBCA1%2D5911B1D85BD2%7D&garden=&minisite=

This article tried to prove one mystery existing in the stock market and investment advisory world -- is it working to track the money supply and analyze its influence to the stock market? The simple answer from the author is that the money supply has tenuous relationship to stock market.

There are many investment advisory newsletters track down the money supply and believe it has a significant influence to the future market change. We used to do it but we gave it up long ago because we got the same experience -- it didn't work.

From time to time, we always wanted to demonstrate some articles just like this one to prove that lots of popular and well-known market analysis techniques actually don't work. We really have no idea how those analysis techniques became so popular in the first place. But our hard-earned investing experience did teach us that very few of them work. And it would be more and more difficult to gain something from those traditional market analyses.

The market changes fast. If you are interested in getting the latest signals and model portfolio update, please subscribe to the 1-month trial offer. Click on the "Get Free Trial" at http://wealthanchor.com/subscribe.html. If you are interested in the past performance of WATTS, please click here.


 

Wealth Anchor

Author: Wealth Anchor

Wealth Anchor L.L.C.

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