Market Commentary

By: Sol Palha | Sat, Nov 10, 2007
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"It was prettily devised of Aesop, The fly sat on the axle tree of the chariot wheel and said, what dust do I raise!" ~ Francis Bacon 1561-1626, British Philosopher, Essayist, Statesman

Extracted from the Oct 30, 2007 Market update

Risk takers are now long and should place stops at 13350. Risk takers should understand that one cannot win all the time but when does win the spoils are usually great as was the case with our last rapid win of over 200% in a few short days. Traders should close these positions out on a test of the 13700-13800 ranges as we feel that one more pull back could be in the works. If you are nervous then close your positions out right now as you are already sitting on gains. Market Update Oct, 23, 2007

It appears once again lady luck decided to favour us with good fortune and our call came true; thus traders should have now closed their positions and locked in gains in the 150-200% ranges. Futures players' locked in gains of 3000-4000 dollars per contract depending on whether they sold at 13700 or 13800.

The markets still remain frothy as market participants are fighting with each other to determine which side of the market they should play; the long or the short side. We expect this behaviour to continue for quite sometime into the future. Our 20 day moving average of new lows continues to lead the 20 day moving average of new highs and the number new lows on the other two moving averages are also gaining. Under normal circumstances the markets would mount another correction almost immediately but due to the possibility of intervention or should we say outright manipulation by the Feds the markets might actually rally a bit higher before correcting. If the Fed heads had any brains whatsoever they would not lower interest rates and punish the fools who were stupid enough to buy a house with almost no money on hand and also the greedy firms that over leveraged themselves by purchasing sub prime mortgages; in this way we would clean the system out and prevent the same stupidity from being repeated in the future. Instead the Feds are trying to stop a raging fire by attacking it with a few drops of water; a futile process that is doomed to fail. Mortgage rates are based on long term interest rates and for the most part long term interest rates are not falling that much; it's for this reason we have an inverted yield curve. The Feds can only play with short term interest rates and it appears that the market is sensing higher rates in the future because long term rates are not following the same path of short term rates. Thus these feeble attempts by the Fed to lower interest rates in their quest to help the stupid homebuyer and business that over leveraged themselves in these investments is going to back fire on them. In fact believe it or not the real long term threat is not inflation but deflation and deflation is something that the Feds simply fear. Thus when deflationary forces hit the Fed will then be forced to hyper inflate which in the long run will lead to even stronger deflation (we will cover this in detail in one of the futures updates). Suffice to say the Feds are being rather naïve if they think a few rate cuts will take care of the crisis in the housing sector.

If the Feds lower interest rates by .25% we suspect the market will rally briefly and then sell off as this cut is already priced in. However if the Feds cut the rates by half a basis point; an incredibly asinine move in our opinion the markets could mount a rather strong rally before pulling back. Short term this could have a negative impact on the dollar but believe it or not the dollar is actually closer to putting in a bottom than crashing. At some point in time we will advise our overseas investors to take a risk and move some of their money into dollars as the risk to reward ratio is soon going to be extremely favourable for this play. Mass psychology dictates that as a rule the crowd is always wrong but when negativity levels reach to dizzying heights then new opportunity is about to present itself. We all know that opportunity knocks only once in awhile, while disaster is forever knocking; most open the door too late and are busy waving good bye instead of saying hello. Right now everyone and his grandmother are negative on the dollar and as a rule the masses can never ever win; they usually overstay their welcome and in doing so give up all the paper profits that they were holding onto.

We are going to analyse the Dow using our theory or what could be termed as an alternative theory to the Dow Theory. For those of you not familiar with this or for those of you that need refreshing please read the following article http://www.tacticalinvestor.com/alternativedowtheory.html.

Our stance is that the Dow Utilities lead followed by the Dow transports and finally the Dow industrials plays catch up. Unlike the Dow Theory we do not believe that the Transports need to confirm the Dow industrials immediately or vice versa. For example say the Transports put in new highs in March and then corrected and 4 months later the Dow put in new highs but the transports are now trading way of their highs; in our books unlike the Dow Theory this is a valid confirmation and the markets will rally to new highs. However unlike the Dow Theory we place more emphasis on what the utilities are doing as they lead the way. So early this year we openly stated that the Utilities had already put in their highs which meant that it was just a matter of time before the Dow would go on to put in its high. Remember we stuck to our bullish stance throughout the year despite severe market corrections and this stance proved to be correct. We will examine this in more detail next week. However let's look at the situation briefly. The charts below will help explain the points we are about to make clearly. (First Chart Is the Utilities, followed by the Transports and the last chart is of the Dow industrials).

Charts supplied courtesy of www.prophetfinance.com

The Utilities put in a new high in the middle of May; this meant the next chap in line to put in a new high would be the Dow transports. In the middle of July the Transports put in a new high. Based on this it was a given that the Dow would follow to put in a new high. For the record we never follow just one pattern, we had several other confirming factors that led us to believe the Dow would rally as we never ever put all our eggs in one basket or all our hopes on one form of pattern analysis. This pattern will fail at some point in the future just as all patterns do but as stated before we never rely on just one form of pattern analysis. Esoteric cycle and Phase shift analysis are just a small sample of the tools we use and then we combine this with Mass psychology before rendering a decision. So based on these factors it was a given that after the Utilities, the Dow transports put in new highs and from the various bullish signals we were receiving from our other indicators, that the Dow industrials would be the next to follow this pattern. At first glance one would think that they followed immediately and put in a new high in the middle of July just like the Dow transports but remember that there is a lag time between the Dow transports high and the time it takes the Dow industrials to put in a new high and thus that high should not be counted. In fact after putting in that high the Dow mounted a rather severe correction and it only just recently went on to put in a new high.

Now all the Dow theorists are busy talking nonsense about how the transports have not confirmed this new high. What we would like to remind these chaps is that the Transports already put in their new high and what we should be waiting for now is a repeat of this whole pattern again. This means that focus should be on the utilities and not the transports. Note that the utilities are currently very close to testing their old highs. On the 22nd of May they closed at 533.7 which was a new high; currently they are trading at 531.80, so they are just a stone's throw from taking out these old highs. When they put in new highs this among many of other tools we will employ will confirm whether the Dow is indeed ready to go on to put in perhaps what will be the first new true all time high. The old highs are all illusory in nature as the Dow needs to trade past 14550 to put in a true new all time high. As the Dow is priced in dollars it has to be adjusted so that the lower value of the dollar is taken into consideration.

As we stated last week investor sentiment is still very negative, the small guy is collectively sitting on what amounts to two trillion dollars in cash (money market accounts), no major sell signals from any of our indicators (both technical and Psychological), NYSE short interest ratio is still in record territory and finally the Smart money is still not aggressively shorting the markets. About the only negative development we have is that our long term smart money indicator has not confirmed any of the current highs and should it either flash a new buy signal or a massive positive divergence signal we will have no option but to tell risk takers to back up the truck and aggressively start buying call options on all the major indices (Dow. QQQQ, SPX, OEX etc).

Conclusion

The press and the big short analysts all continue to talk about the effect of the now dying housing sector, the sub prime mortgage crisis, the liquidity crunch and whatever other nonsense they can dredge up. Yes this all valid news but it was valid news over 2 years ago and the market to some degree have already priced this junk in. What's taking place now is just good old profit taking. Today's experts are nothing but old fisher folk or housewives who have nothing to do but gossip about their neighbours problems; they simply regurgitate the same crap over and over again and try to market it off as Caviar. Do not fall for this garbage. There will be a day of reckoning but that day is not yet here yet and if you sit waiting for it you will sacrifice plenty of opportunities. Fear never ever made anyone money and worse it only serves to increase your stress levels. At TI we believe the most important thing is to keep ones stress levels down, for good health is the ultimate investment out there. Without your health you are worth absolutely nothing.

If our smart money indicator should give a new buy signal or flash a strong positive divergence signal we will advise all risk takers to load up on call options and or futures plays on the Dow and SPX. In the interim we still believe the Dow Industrials will most likely correct one more time and there is a decent chance that it could test its lows at the 12500 level. The Dow needs to hold above the 13350-13400 ranges; a break below these levels will first push it to the 13000 mark and failure to hold here could drive it all the way down to the 12500 mark. All massive pull backs should be viewed as buying opportunities and when the time is right we will issue specific entry points for traders willing to take on a bit of extra risk.

"A celebrity is a person who works hard all of their life to become well known, and then wears dark glasses to avoid being recognized." ~ Fred A. Allen 1894-1957, American Radio Comic

 


 

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.

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