The Markets

By: Sol Palha | Mon, Oct 31, 2005
Print Email

"Not many men have both good fortune and good sense." - Titus Livy BC 59-17 AD, Roman Historian

This article contains portions that were extracted from several past mkt updates (Sept 20-Oct 20, 2005)

The SP 500 and the Dow have hardly corrected when you look at things from the surface; dig deeper and you see something interesting. This lack of decline has been masked by the strength in the energy sector; indeed there are many stocks in the Dow that have experienced pretty significant corrections but most of this has been masked by the strong gains in the energy sector (certain Tech sectors to appear to be reacting in the same way as the biotech sector). As we have continually stated in the past these markets are getting more and more complex; it's no longer a matter of just simple TA but one must also have the ability to see invisible corrections, peculiar patterns that could be precursors for big moves, the ability to know when to ignore certain TA tools even though they are screaming sell and the ability to constantly decipher on a psychological level what the markets participants are thinking. Yes the markets are getting harder to decipher but that's what the markets are all about; you either adjust or die. To illustrate this silent correction lets look at some of the Dow components. We have posted two tables below; the first one is about a month old and the other one is up to date as of 10/20/05.

Taken from the period 9/20/05-9/22/05
Stock High Current Price % Loss
PFE 33.05 25.33 23.12
MMM 86.71 71.50 16.67
AA 34.42 26.92 23.88
JNJ 69.99 62.20 11.11
SBC 27.25 23.87 12.40
JPM 40.40 34.11 15.5
C 49.73 43.88 11.7
VZ 42.25 32.48 23.12
IBM 98.15 79.46 18.69
WMT 57.89 44.85 22.52
DD 54.90 38.85 29.23
MRK 34.94 27.62 20.95
Average Loss    19.07


Current as of 10/20/05
Stock High Current Price % Loss
PFE 33.05 21.90 33.7
MMM 86.71 74.90 13.6
AA 34.42 23.36 32.13
JNJ 69.99 63.94 8.64
SBC 27.25 22.54 17.28
JPM 40.40 34.75 13.9
C 49.73 44.34 10.8
VZ 42.25 29.20 30.8
IBM 98.15 83.17 15.2
WMT 57.89 45.60 21.22
DD 54.90 38.77 29.3
MRK 34.94 26.92 22.95
Average Loss    20.79

One of the definitions of a bear market is a decline of 20% or more; if the Dow had done this all the pundits would be screaming like grasshoppers on Ecstasy that the markets were ready to crash. The Dow on the other hand has barely corrected 7% (high 10984, current price 10270); one look at the components of the Dow and you get a completely different story. An average correction of 19.07% certainly bodes as a rather steep correction. So what are the markets trying to tell us? Are they telling us that for all intensive purposes they have already corrected and the only thing masking this correction is the strength in the Energy sector? The real answer might be a tad bit difficult to extract from the markets but the action of the last few days suggests that the markets are building up strength for the next leg up. We have had a string of extremely bad data, huge budget deficits, consumer prices surged to 27 years high Full Story, wholesale prices surge to 15 year highs Full Story, three hurricanes and potentially a 4th or 5th one, disruption of refining and distribution capacity of oil and natural gas etc and the market has not crashed at all. There are few other factors that somewhat make for a good bullish argument. The number of individuals shorting shares in odd lots has truly taken off (this is the dumb money and they are usually wrong), the number of individuals that are bearish is also on the rise (as indicated by the table below) and there are some positive divergences if one looks at the second table above. Even though the markets are trading at lower levels then they were approx a month ago, 5 stocks are trading at slightly higher levels; stocks that break out early usually lead the way in the next leg up.

 

10/16 10/9 10/2 9/25 9/18 9/11 9/4
Bullish 38% 30% 33% 15% 22% 43% 29%
Bearish 38% 57% 56% 64% 49% 21% 47%
Neutral 25% 14% 11% 21% 29% 36% 24%
DJIA Median Guess 10151 10247 10252 10352 10476 10602 10313

Generally speaking for the last 6 weeks the number of bears has been increasing rather rapidly and in those instances where the numbers dropped the number of neutrals jumped up. On 9/11 the number of neutrals jumped to 36% and on 10/16 the number of neutrals went up by another 11% from the preceding week (10/9). Neutrals represent bears without teeth or individuals that are usually too scared to take a position, which is a bullish factor; it therefore makes sense to add these numbers to the individuals that are bearish. When one does that the individuals that are bearish or clueless seem to dominate; this is yet another bullish signal.

2-year chart of Dow With weekly Bars

9-year chart monthly bars

Conclusion

Even though we have had a slew of negative data in the last month the markets have been resilient and it brings the term "A market climbs a wall of worry and falls down a cliff of joy" to mind. It seems that when one examines all the list of negatives which is rather long (we are not going to mention them here as they are being broadcasted all the over the place) and looks at things logically it appears that the markets should crash but this has not been the case to date. As a result we would be very careful about shorting this market right now, as it seems to have resisted some of the worst news out there. We decided to look at two charts the first chart looks at the intermediate picture (2 years worth of data) and the other provides a long term view; in both the long term up trend lines are still intact. Thus our conclusion is that even though there are many factors pointing to a huge market correction and maybe a crash there are other factors, which suggest betting on this, might not be a wise thing to do. Several things stand out.

  1. Dumb money (number of odd lot shares being shorted) seems to be shorting the hell out of this market.
  2. The markets have digested a huge amount of bad news in stride. This is a very bullish development.
  3. The long term up trend line in both the intermediate time frame and long-term time frames are both intact.

"The world has always gone through periods of madness so as to advance a bit on the road to reason." - Hermann Broch 1886-1951, Austrian Novelist

Charts were provided courtesy of http://futures.tradingcharts.com/custom_menu.php
Sentiment table provided courtesy of www.lowrisk.com


 

Sol Palha

Author: Sol Palha

Sol Palha
TacticalInvestor.com

Sol Palha is a market analyst and educator who uses Mass Psychology, Technical Analysis and Esoteric Cycles to keep you on the right side of the market. He and his partners are on the web at www.tacticalinvestor.com.

The information contained herein is deemed reliable but no guarantee is made about its completeness or accuracy. The reader accepts this information on the condition that errors or omissions shall not be made the basis for any claim, demand or cause for action. Any statements non-factual in nature constitute only current opinions, which are subject to change. The author/publisher may or may not have a position in the securities and/or options relating thereto, & may make purchases and/or sales of these securities relating thereto from time to time in the open market or otherwise. Neither the information, nor opinions expressed, shall be construed as a solicitation to buy or sell any stock, futures or options contract mentioned herein. The author/publisher of this letter is not a qualified financial advisor & is not acting as such in this publication. Investors are urged to obtain the advice of a qualified financial & investment advisor before entering any financial transaction.

Copyright © 2004-2016 Sol Palha, All rights reserved.

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com