Market Commentary

By Sol Palha

Who never doubted, never half believed. Where doubt is, there truth is -- it is her shadow.

Philip James Bailey,1816-1902, British Poet

 

 

We feel that shortly the worlds central bankers will sit down and decide its time to do something for if not the situation could worsen and that is something none of them is looking forward too. This group intervention could produce a rather massive rally as the markets will view anything in this light as a strongly positive development. Market update March 4, 2008

Well US central bankers led the way and they should since this mess originated in this area; their promise to flood the credit markets with liquidity produced one of the strongest rallies in years; it is the biggest single point gain since July 2002. Interestingly enough the current market picture is very similar to that of 2002 and 2003.  From 10/09/02 to 11/27/02 the markets surged; from the beginning of March 03 to the end of March 03 all those gains were given back. However it would have been a mistake to think that a bear market had started for after pulling back till the end of March 03 the Dow mounted a massive run that took it from 7600 all the way to 10800 before pulling back in April 2004. This can be seen in the chart below.

Now from middle of Jan 08 till the end of Feb 08 the Dow rallied but since then it has virtually given up all its gains and was almost back to square one (look at the chart below).  Many were calling for the end of the world but out of nowhere the markets mounted one of the biggest one day moves in almost 6 years. Granted the Feds had a role in it but there is always some reason that is assigned for a major move up or the beginning of a new bull market.  Will the current pattern be a repeat of the one in 2002 and 2003; only time will tell but we feel that the odds are high that it will?  For one we have several positive divergence signals on the daily charts, secondly after weeks of low volume today’s volume surged well past the 5 billion and this indicates that today’s rally has some legs behind it.  Investor’s intelligence which tracks 100 advisory services show that only 36.7% are in the bullish camp; this is the lowest percentage of bulls in almost 2 years.  American Association of Individual investors (AAII) shows that the bears at 59% and the bulls are at roughly 20%; this is the lowest reading in almost 3 years.

 

Now another very interesting development has been occurring and we spoke of it last week.  For the first time in years our smart money indicator has not confirmed the recent wave of selling; it has started to diverge and there is now a 96% chance that it will generate a buy signal shortly.  We will know for sure by the end of the week.  However its current action is very bullish and we would simply be thrilled if it were to flash a buy signal next week for it would significantly increase the odds of a massive upward move.

On an intra day basis the Dow did not trade below its Jan 08 lows but on a closing basis it did and in doing so several new positive divergence signals and buy signals were flashed by our indicators on the daily charts. It would have been even better if the Dow could have tested its lows but the current pattern is very similar to that of the one that occurred between Oct 02 and March 03; even though the Dow gave up most of its gain in March 03 it did not test the Oct 02 lows. So we could be actually seeing history repeat itself again.

Now everyone is talking about a recession and as always the economists are totally useless when it comes to predicating the onset or end of a recession. You would have better luck hiring a monkey and asking it nod up and down for yes and sideways for no then with these over paid economists. Now that they are all busy jumping around and proclaiming that we are close to a recession or in one; the chances that we are close to the end  of one are pretty high.  It is not normal to have recession during presidential cycles but while this is rare it’s not unheard off.  During the last 6 decades  there have been two such instances and both ended fast and the markets went on to rally higher in a relatively short period of time.  In 1960 the market declined 17.4% from Jan to Oct and we entered into a recessionary phase but 4 months later the markets put in a bottom and by Oct of 1961 they had gained an additional 30% (look at charts below).  It only took one year for the Dow to achieve this huge move of 30%.

Then once again they mounted a rather strong correction that lasted from Jan of 62 to July of 62 and then the Dow mounted a rally that lasted till 1965.

In 1980 the markets declined 16% from Feb- April and the economy again entered a recessionary phase but the markets put in a bottom relatively rapidly and from April 1980 they rallied to April of 1981 for a gain of 32.4%.   (Look at chart below). 

The main point here is that these two corrections and recessionary phases occurred during presidential cycles and in both cases the outcome was positive.  Historically the markets almost always close up during presidential cycles and even when they experience hard times as was the case in 1960 and then in 1980 the end outcome was positive.  Another interesting factor is that as of late bear markets are getting shorter and shorter; the last 3 or so bear markets were over in matter of months as opposed to years.  Perhaps one of the reasons for this is the increased number of players and the advent of the internet; these two forces help move the market from one extreme to the other in relatively short periods of time.  The internet has taken herd mentality to the next level with a simple click of a mouse a new story can affect millions upon millions of traders simultaneously. In the old days one had to wait for the news to get around and the effect was not as pronounced; now the effects are usually instantaneous. The big players must love this simple technique for it has worked marvellously for generations upon generations; however now they are able to create this effect in a matter of hours as opposed to days. Always remember that when people are crying gloom and doom, opportunity is lurking somewhere you just have to be relaxed to see it. When the masses are busy celebrating with joy, disaster is waiting to rear its ugly head; point and case the recent housing bubble.

Conclusion

We will know by the end of this week whether our smart money indicator has flashed a buy signal or not but right now we are almost there as there is now a 96% chance that it will flash a buy.  While nothing is guaranteed this is the closest we have been to getting a buy in over 3 years.  Another strong positive was the nice spike in volume to over the 5 billion mark on Tuesday; prior to this the volume was well under the 4 billion mark. Even on Friday last week and on Monday this week when the markets were mounting strong corrections, the volume never surged past the 4 billion mark. Thus Tuesday huge upward move coupled with volume that came in at an excess of 5 billion shows that the smart money was accumulating shares.

As we stated last week the best thing to do now is to focus on the stocks that are holding up best in our portfolio; the early leaders are the ones that will blaze the way upwards once the markets are done correcting.

Risk takers can also go long the next time the Dow trades in the 11900-12000 ranges. As stated before we will measure the gains in terms of points gained from our suggested entry points. However traders can go long via options on the DOW, QQQQ’s, OEX and futures traders can simply go long Dow futures contracts.

The above article was extracted mostly from the March 11 market update

 

 

Additional new comments March 24, 2008

Since sending out the above article to our subscribers the markets have gone on to rally much higher; in between these huge rallies the markets experienced rather vicious pull backs but despite this they appear to be trending upwards. The bail out of Bear Sterns was greeted with enthusiastically and the new higher offer from Chase JP Morgan produced yet another rally.  The Dow is currently range bound and until it is able to decisively break past 12800 on high volume and stay above this level for a sustained period of time, the range bound action will continue.  Once the Dow is able to stay above 12800 for at least 15 days in a row it should have the power to test at least the 13450 mark before pulling back. Until then this range bound action is already producing many stocks that are actually trending higher and once the markets stabilise these chaps will be the ones leading the way up.

We note with interest that despite the fact that oil soared to put in several back to back all time new highs before pulling back the transports did not go on to put in corresponding new lows. In fact they traded at a level that was significantly higher than their Jan 08 lows; this is a clear strong intra market positive divergence signal. It also confirms the pattern which we discovered several years ago (we have spoken of this several times in the past) which states the following

1)      The Dow Utilities have to lead the way up and go on to put in a new high or a series of new highs. The utilities put in back to back new highs in Dec 07 and Jan 08 before correcting.

2)      After this achieved the transports follow should suit; to indicate that transports are on their way to achieving this, they should bottom before the Dow and start to diverge from the Dow. While the Dow tested its lows on a closing basis this month the Transports did not even come close to testing their lows

3)      After the transports have put in new highs the Dow should follow suit.

Thus it appears that two conditions have already been fulfilled the utilities have gone on to put in new highs and the Transports diverged from the Dow; they did not go on to test their Jan 08 lows. All that is left now is for the transports to go on to put in a new high. With oil pulling back and with Feds aggressively lowering rates this situation that was once a very long shot now appears to have a chance of becoming reality.

The markets have corrected rather severely and most investors have been destroyed on a psychological basis one should not expect the markets to simply turn around and race upwards. In the words of one wise man “the best time to buy is when there is blood on the streets” and we feel that blood has been flowing rather freely and strongly on these streets.

They are ill discoverers that think there is no land when they see nothing but sea.

 

Francis Bacon
1561-1626, British Philosopher, Essayist, Statesman

 

 

All charts were provided courtesy of www.prophetfinance.com