My Thoughts III

[HenryTo]

Here are some thoughts on a bright Friday morning:

* The Dow Transports tanked 110 points yesterday - initially declining in the morning on the weakness of the FexEx report and never looked back. On the basis of the Dow Theory, the Dow Transports never confirmed the Dow Industrials on the upside, and yesterday's close was the lowest close since May 13. Since the Dow Transports has been the leading indicating since the cyclical bear bottom in October 2002, I now believe the line of least resistance for the stock market is down at least during the next two to three months.

* Our 10-day and 20-day annualized volatility levels "predicted" that there was a big move coming soon - and given the subsequent action of the market in the last five years, I conjectured that the action will be down. Yesterday was definitely a technical breakdown. That is, oil prices were already high for the last five to ten days already and everyone knew it. The breakdown on no news or rumors at all makes it an ominous one.

* The DJIA close of 10,421.44 is now below the level of where we switched from a 50% long position to a completely neutral position on our DJIA Timing System. Readers have asked me why I acted so soon - and not leave the remaining long position and put a stop loss on it instead. I acknowledge that, and will most probably adopt different strategies as our system evolves going forward. Part of the reason, however, is that when I sold our remaining 50% long position in the DJIA, I didn't believe the long positions that we recommended (large cap growth/brand name stocks) were going to do well going forward. This has been mostly confirmed. Just look at the dismal performance of YHOO, EBAY, SBUX, etc., after our June 13 sell signal on the DJIA Timing System.

* The latest money supply numbers were released from the Fed last night. Latest M-3 grew by $16 billion but so far, the 52-week increase on the 20-week and 40-week moving averages is still not very impressive. I will post an updated chart in our weekend commentary but the 52-week increase on the 20-week moving average of M-3 actually declined slightly from last week. M-3 numbers will have to continue their recent ascent before they can even make a dent to the big picture.

* Finally, the NYSE McClellan Oscillator turned negative for the first time in a while last night - further suggesting that the line of resistance is now down. Expect more negative breadth going forward if you are an individual stock picker.

I will come up with a more detailed analysis this weekend. Hope everyone is doing well!

Best,

Henry

[Dubious]

Thanks Henry.

I went 300% short. Leveraged to the hilt.

I see DOW 9750 before a rally starting around the first week of October.

Get out after x-mas.

[HenryTo]

Nice call, Dubious.

Looks like the ST trend is still down at the moment - my guess is that the DJIA will be below 10,000 once this trend is finished.

Best,

Henry

[Dubious]

[quote="Dubious"]I with ya brother. Sold all my longs today.

And shorted at 3:40pm.



EOQ cohersion rally. You can set your clock to it. I believe we talked about this before?

I like salad for my dressing - however the dressing tends to go sour in a day or two. [/quote]
J A C K P O T

[Dubious]

I with ya brother. Sold all my longs today.

And shorted at 3:40pm.



EOQ cohersion rally. You can set your clock to it. I believe we talked about this before?

I like salad for my dressing - however the dressing tends to go sour in a day or two.

[HenryTo]

Looks like the bounce I was looking for came to fruition today. Even though breadth was good, volume was definitely a little bit to the side. Moreover, bullish sentiment is still rampant - as evident by the three-year high in the Consumer Confidence poll and in the P/C ratios, etc.

The NYSE McClellan Oscillator rose 71.60 points to (4.39) - right near the zero line. It is do or die time, essentially. My guess is that tomorrow will be a non-event, followed by more volatile times after the Fed announcement this Thursday afternoon. Given the current sentiment, I think that today was just a mere bounce. Any continuation of this rally should be sold, not bought.

Best of luck,

Henry

[HenryTo]

The Dow Transports closed down 15.4 points today at 3,395.84 - a mere 12.95 points above the most recent closing low of 3,382.89 on April 15th. My guess is that we should see a bounce of the Dow Transports and the other major indices at or near this level, but IMHO, the breaking of the Dow Transports below the April 15th closing low is now inevitable.

It is also interesting to note that the Bank Index closed down 0.29% today at 98.34 - a mere 0.17 point above its 50-day moving average. Again, there *should* be a bounce here probably as early as tomorrow. But if it doesn't happen, then watch out below - especially in light of the Fed meeting on Wednesday/Thursday of this week.

Henry

[nodoodahs]

I've got a few toys I'm playing with. The one I'm referring to most has defined next quarter's S&P500 and 10YT returns with annual M3 growth, quarterly M3 growth, and S&P500 returns over TTM. I'm using it to assess odds of major crackups and whether it's better to stay in stocks, move to bonds, or move to cash.

For example, take weeks where M3 annual < 4% and M3 quarterly > 0.9%. Here when the S&P TTM is under 9%, you don't have great odds of a good quarter in the S&P but you do actually have upside volatility in stocks and a good chance of appreciation in 10YT. If the S&P TTM is above 9% then you pretty much have a 75% chance of negative return in S&P and 70% chance of 10YT decline as well. Flip side is that when M3 annual < 6% there is negligible chance of a bust (defined as S&P dips by 10% in the following quarter).

I've set up some signals where I plan on moving to bonds or cash for 13 weeks, based on those inputs evaluated on Friday night. When backtesting this, I got an alpha of 5.5% over staying in the S&P500 index, going from Jan 82 through today. Suggests I should be out of the market about 13% of the time.

Possible strategy may be to short some stocks then, using the opposite criteria of my long picks, i.e. establish short positions on stocks with pricey valuations and poor fundamentals when my long positions (which have low valuations and good fundamentals) go to cash or bonds.
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[HenryTo]

Bill, would you mind telling us a little bit more about your S&P and treasuries model? For example, what are the parameters that drive your results? Is it a combination of the Fed Funds rate and the M3 growth rate?

Thanks,

Henry

[Dubious]

Good point.

[nodoodahs]

Dubious,

To lose control ... didn't they have to have control at one time?


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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[Dubious]

U.S. Inflation Bonds are paying 4.8%.

Purpose of i bonds are to maintain buying power.

That would mean the U.S. gov believes neutral is 4.8%.

The fed has lost control. Again.

[nodoodahs]

I'm actually a little (just a little) psyched by the quarterly M3 growth rate. The past two weekly evaluations are +1.70% and +1.92%, which historically isn't too shabby and compared to the average weekly evals of quarterly growth over the past year it's nice. Granted the annual M3 growth isn't anything to crow about. I agree with Henry it'll take a sustained increase over the next few months to make a difference.

But I think the situation isn't unstable at all. My model is showing: predicted quarterly range of returns between -2% and +8% for S&P500, 43% chance of next quarter's return being above +2.8%, 57% chance of Treasuries having a positive return.

Not that I think my model is all that and a bag of donuts, but what do I lose by going on record with what it says?

Given the evidence of a "slowdown" as measured by conventional measures, the Fed (who relies on the conventional measures) will stand a good chance of shifting stance to a 3.25 or 3.50 max FFR. Should be an interesting Fed announcement upcoming ...
_________________
I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[HenryTo]

Thanks! You too, Dubious. I will be on a flight to LA very soon and will come back to Houston tomorrow so I won't have access too much to the computer. Best of luck!

Henry

[Dubious]

Great stuff Henry.

Thank you!

Have a great weekend.