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December 26, 2005 A Banana Peel Market - Are You Listening? |
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Opening Whisper Let me start by wishing you all a very merry Christmas, happy Hanukkah and the best of holidays to you and your family. I hope that this will be a great time to enjoy your family and friends. In this holiday-shortened report, I thought we would just review the status of our sentiment charts and the extremes which we are seeing in this market. I can't recall a time in which we have seen such divergences between the technical indicators (momentum & MACDs) and market index pricing. Will these divergences result in a market sell-off next week? Or will they diverge even more, leading to a sell-off in the stock market in January? As I read and hear the prognostications for the markets, it seems that the general view is for the markets to rally during the last 4 trading sessions of the year next week on low volume and possibly into the first few days of January. Then, the selling starts as investors get a sense of the slippery slope that the economy is on and the "fact" that the economic peak of the business cycle is behind us. They cite seasonal tendencies, the 4-year cycle, the mid-term election year of a second-term president and other numerous bits of evidence. Most of that thinking comes from the bearish persuasion. In the bullish camp, I keep hearing about corporate profits and coffers full of cash and how that's such a good thing. Somehow, corporate cash is fundamentally supposed to be turned into dividends, share buybacks, corporate buyouts and even greater earning power. I'm sorry Joe. I haven't quite bought into that argument for myself just yet. Show me the money. Let me see how these bullish arguments move market prices and only then I will be a believer. It seems to me that the bullish camp is running out of upside surprises and logical arguments. Personally, I am trying not to buy into any of the present prognostications. If I have any bias at this time it is slightly on the bearish side of the slate. This bias has only resulted because of the extremes which have developed since October. We have near-term extreme lows in the put/call ratios and VIX and extreme highs in the SPX/VIX ratio and are barely off of 4 year highs in the market indices. In addition, our Market Listener Double Stochastic Summation Index (DSSI) vaulted to a peak on Dec. 6 which had not been seen since early 2000. (The DSSI is the summation of weekly and 100-period stochastics) When these bullish extremes are so prevalent, the market is whispering that there is some downside risk to prices. If the market rallies any further, the declining slope could look something like investors standing on a banana peel on the edge of an icy oil-impregnated slope. It certainly does not look like a rosy picture given the recent slipping of new home sales across the nation. But this banana peel market has weathered a lot this past year, continually turning bearish arguments and downward pointing arrows on charts into just so much ink on paper. What Is The Current Market Sentiment? The market has a bearish micro-trend at this point which is superimposed on the bullish trend from mid-October. Sentiment has not moved much from the extreme bullish case. The CBOE Total Put/Call Ratio weekly chart below seems to be returning to sell alert levels presenting another case for a bearish extreme and a short-term top.
In spite of the selling on Monday of this past week, the CPC and VIX sentiment gauges have moved to very bullish extremes of greed. Does everyone expect the expected? Of course we will have a post-Christmas rally. It's a slam-dunk sure thing, right? That seems to be the bet that the market has been buying into since Tuesday. From a contrarian view, both VIX and CPC are closer to sell signal extremes than they are to buy signal extremes. Expect the unexpected when everyone is singing the same tune. And it sounds like "Jingle Bells" this time of year. The weekly VIX chart below shows just how quickly bullishness has accelerated into large-cap options since mid-October. Some options experts suggest that the VIX must move in a "bearish" direction (higher) before it signals that the bull rally is over. I tend to take a little quicker bearish posture when the VIX reaches such extremes in such short order. The acceleration of the VIX in the downward direction to me implies that options pricing (particularly - puts) has declined in price because put sellers are selling them like hotcakes - at any price. This naked put selling, if done by amateurs, could be their undoing since they are likely selling January expiration options. Should the market sell-off in January as it did in January 2005, these amateurs may have a difficult time buying back those pricey puts or "covering" their puts by shorting stocks of declining valuation.
We seem to be on sentiment watch for the banana peel that triggers a slip and fall. Our Trading System - What The Numbers Are Telling Us I'm going to skip the in-depth commentary on our weekly NDX chart model and just let you review that model yourself. I will also include the same chart model for the other major indices so that you can see where we are in each. The NDX weekly model is "voting" for a Sell signal (3 sell indications), but it's still too early to get a sell signal confirmation from the weekly NDX chart since the weekly stochastic is still above the 80 level. The other major indices are not yet as bearish as the NDX.
I like the above chart very much. It is a "no-nonsense-don't-try-to-pull-the-wool-over-my-eyes" type of chart which is basically a smoothing of the McClellan Oscillator. It tends to have a minimum of delay or lag and sometimes even leads the broader market. It tends to act like a ZigZag indicator showing us clearly, at least in hindsight, where the market turns occurred. The Nasdaq Summation Index ($NASI) has been a good indicator signal for the NDX. Note the similarities in chart of December 2004 with December 2005. You will see that it dipped to signal an early exit, flattened a bit in the last half of December, before confirming the January 2005 sell-off. We are possibly seeing similar action in the NASI chart for year-end 2005. The MACD is telling a story similar to the index action. Where do we go from here and how to Listen for the Next Signal?
The following are available in the subscribers' reports or on the website; Risk Analysis: Trend-Following Compliance: Fault Tolerant Cash Safety Stop (FTCSS) Calculation & Discussion: The Markets Are Whispering - Are You Listening?
3 This Market Listener signal is our base signal.
The MACD is our primary weekly input, but can be "out-voted" by the other
faster or proprietary indicators on a daily basis when we need to go to cash
to implement our Fault Tolerant Cash Safety Stop (FTCSS). You should not
base your trading on this or any other single indicator. Our trend following
system can dynamically adjust parameters based on current market conditions
including volume and sentiment factors. We also employ proprietary indicators
which can override the current model.
Mutual Fund Restricted Trader (MFRT) Mutual Fund traders with trading restrictions (timing or significant fees) are currently on a CASH signal. {These signals are available only to subscribers of the Market Listener} NOTE: The Market Listener Trading Signal is different and much quicker than this Mutual Fund Restricted Trader (MFRT) signal. Listen To What He Says KJV Luke 2:15-18 And it came to pass, as the angels were gone away from them into heaven, the shepherds said one to another, Let us now go even unto Bethlehem, and see this thing which is come to pass, which the Lord hath made known unto us. And they came with haste, and found Mary, and Joseph, and the babe lying in a manger. And when they had seen it, they made known abroad the saying which was told them concerning this child. And all they that heard it wondered at those things which were told them by the shepherds. I am working on the art of listening and hope that you are also. Best Profits, 
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Gregory W. Miller, P.E. Paid Subscribers receive mid-week alerts to market changes that impact our system. The alerts advise of changes in stop level or signal changes prior to the Friday close of trading. The Market Listener Trading System - My adaptive trend following trading system is the result of years of mistakes. I always seemed to be zigging when I should be zagging. My investing was based too much on emotion and inputs from so many varied newsletters and methods. After what has been literally years of personal research into cycles, Elliott Waves, artificial intelligence and many other systems, I have learned that my own trading style is best handled by avoiding the "art" of prediction at all costs!!! When I looked at moving averages for indication of trend direction, it seemed that they too were always 180 degrees out of phase with what I should have done. My conclusion, after many losses and much frustration, is that I needed to keep it very simple and let the market tell me what it wanted to do. In particular, I wanted to follow the trend, which is your friend, until the market whispered, or shouted to me that it wanted to change directions. And then, I found that Stochastics and Rate of Change indicators help me go to cash until the trend reverses or continues. Thats how my trend following system & its cash management component developed. I trade Rydex Venture and Velocity funds by which I can go short (x2) or long (x2) the NDX (NASDAQ 100 Index). I hope my newsletter and its insights can give you an education on alternative investment strategies. You might find your own technique or modify mine. Links: About the Author: Gregory Miller is a registered Professional Engineer (PE) in the State of Texas. He has been involved in electrical engineering and projects in the U.S. and some far-flung regions of the world. Greg has studied the markets for decades and enjoys applying his analytical abilities and computer number crunching to the science of investing. Copyright © 2005-2006 All Rights Reserved by Gregory W. Miller Image rendition and html coding Copyright © 2000-2009 SafeHaven.com ADVERTISEMENTS
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