General Market Outlook
"Patience. A minor form of despair disguised as a virtue." -- Ambrose Bierce 1842-1914, American Author, Editor, Journalist, "The Devil's Dictionary"
Extracted from the Feb 23 market update.
The markets really can be fascinating to those who are willing to take the time to study them. Increasingly it appears that pure Technical analysis is no longer sufficient to keep one on the right side of the market all the time. It appears that mass psychology is starting to take an even bigger role in predicting market direction. The good news is that the majority will never fathom this tool because the perquisites are Patience and discipline.
Once again we are seeing a major shift in sentiment, for few weeks its bullish then bearish then mixed etc. We are starting to see newsletter writers shift into the bullish camp, which means that this bearish. However the talking heads at CNBC are know busy mouthing that the markets are topping and the economy is going to head into a recession; bullish this is for us. Then we have many pundits making a lot of noise about the inverted yield curve and how this is a definite sign that a recession is in the works. There are two-pieces of info that are interesting in regards to this issue
- The new Fed head stated that the Economy is strong enough to over power the inverted yield curve because rates are lower then they would need to be to trigger of a recession. (It does not matter if this is true or pure baloney because the masses will swallow this and initially at least the effects will be positive).
- The main point however is that even during the Asian currency crisis of 1998 where the yield curve was inverted it did not bring about a recession as was expected. It does not necessarily mean that an inverted yield curve will trigger one, though in the long term when one combines all the other negatives an inverted yield curve does not bode well for the markets.
Okay CNBC talking heads also talk about the weak breadth and how this rally appears to have no legs. Well they have been saying this for a long time. If this bull appears to have no legs our question is what does the bear have? This chap has been skinned, fried and buried alive so it appears that he has lost most of his body parts. All puns aside the bear will raise it's head again but in general the bear can never win for an extended period of time. Which goes to show that negativity is not really good for ones health, as negative things don't usually produce good results. We will one day take advantage of the bear's resurrection and short the market. Even in extreme corrections there are very sharp rallies in between, which usually cost most bears all their profits. So one has to be careful how one goes about shorting the markets.
What is rather interesting is that even though the breadth appears to be unimpressive as shown by the AD line (advance/decline line). The three moving averages of new highs we keep still indicate that the markets are relatively healthy.
|Moving average||New Highs||New lows|
If one looks at these moving averages the market looks extremely strong from an internal point of view. Another factor is that the A/D line is too widely followed and if one looks at its performance over the last few years; the words dismal or pathetic come to mind when one looks at its power to predict tops.
Furthermore the dumb money continues to short the hell out of this market; in fact this number has risen when compared to last weeks number. The very smart NYSE specialists are holding onto a small long position and have one of the lowest short positions in history. So these two factors are rather bullish. Our smart money indicator is also confirming this move up in the markets and our omega indicator moved a little bit closer to issuing a buy. We however doubt it will issue an outright buy but it does look good that it moved further away from the neutral zone. So given the above info we have to still remain bullish. One another area of interest is that the Dow transports have already put in a new all time high and so it appears it is just a matter of time before the Dow follows suite.
Chart courtesy of www.prophetfinace.com
This is a 6-year weekly chart of the Dow and we can clearly see that the Dow has been locked in a tight channel formation for slightly over a year now. At this point in time the Dow is testing the top of the channel formation attempting to build energy to blast past it and put in a new all time high. The firs target will be a test of the 11, 200 ranges after that we think the Dow will attempt to enter our first target ranges (11350-11430). If the momentum is strong here then we think there is a chance that it could trade past 11,600. At this point in time the crows should be Euphoric, as it will appear to everyone that the worst is behind us, the economy looks strong and the future is bright. In a perfect world this scenario could be true but in the present day world it will be nothing but an illusion waiting to be shattered. After the Dow hits one or two of the above targets it will trend sideways testing everyone's patience. Nothing happens immediately otherwise it would be too easy to make money in the markets. The topping action could technically take another 6 months where we slowly but surely trend downwards (when the real move begins it will be explosive to say the least). At this point in time the wise trader will start looking for stocks that are breaking down (trend analysis), have 3 or more up trend lines, are issuing multiple negative divergence signals etc to build up a nice list of shorting candidates. Once this list is constructed one can start to nibble not bite either by directly shorting these stocks or by buying puts. We will also be looking at few stocks but it appears that we will most likely short the market via the indices Dow, Nasdaq etc.
It is said that all good things must come to an end, but that begs the question what is really good and what does the end really mean? One man's sanity can be another's insanity and ones beginning can be another ends. Time is also a slippery subject; to some waiting patiently for a few years is nothing but to others a few months seems like an eternity.
Our view is simple there is a time to party and there is a time to cry and there is yet one more stage that very few are aware of and that is the relaxation stage. One can either cry or relax after the party is over; the wise chap always chooses rest over tears. We will sit and wait for a shorting opportunity to present itself and then take positions. Rather then cry we think it will be a good time to get some well-deserved rest. Disaster is nothing but opportunity knocking in disguise.
On a different note this last spike in the markets is going to be like rocket fuel for a many stocks out there; as usual most of them will be in the small cap to very small cap arena.
It is interesting to note that many of the targets we are hitting now were posted in article we wrote almost 3 years ago when the Dow was barely trading in the 8500 ranges.
If we can hold in the 8,800 to 9,000 ranges, then the outcome looks rather interesting. Esoteric cycle analysis (our proprietary indicator at the Tactical Investor) is basically suggesting the following targets if we can hold the above ranges:
1st target will be a break of the Dow over the 10,000 range
2nd target 10,500
3rd target 11,400 (we came to within 67 points of this target as we traded as high as 11,333 this Tuesday)
Extreme target 11,7000 Published Nov 11, 2003. Full Article.
"I think knowing what you cannot do is more important than knowing what you can." -- Lucille Ball 1911-1989, American Actress, Producer