07/27/07 Where is the market going now?

[Jim Nickerson]

Mike Burk in his weekly Technical Market Report http://www.safehaven.com/article-8060.htm concluded:

809 new lows on the NYSE a week after an all time high in the DJIA is a first (the black swan thing). In one week we have gone from looking at a developing top to looking at a developing bottom. Tops usually take a while to develop with the blue chips making new highs while the secondaries deteriorate. So it would not surprise me to see another all time high in the DJIA before a final collapse. Short term the market is very oversold and I expect it to rally.

Just considering the equity indices, I guess last week's drop was traumatic to those who were long the markets.

Assuming my spreadsheet data are correct, the SPX, DJI, Nasdaq, and NDX hit closing highs just six market days ago, and the RUT and VGY (Value Line Geometric) hit closing highs 10 market days ago. With the declines since those highs, the DJI is off 5.39%, the Nasdaq off 5.96%, the SPX off 6.23%, the NDX off 5.05%, the RUT off 9.18%, and the VGY off 7.77%. So in these short periods, this correction has not produced much in the way of losses from the highs. I hope most people would agree with that assessment.

Yet looking at the advances/declines and new highs/new lows data for the NYSE and Nasdaq, it appears that the markets should be near some bottom.

For the NYSE for the weekended 7/28 there were 3192 declines vs. 330 advances. That number of declines is the greatest of any week since weekending 5/14/04 which is as far back as my data goes. And the 330 advances is also the least over the same period. Similar lows for the Nasdaq occurred during the minor correction in the weekending 3/2/07; this last week's Nasdaq declines and advances were just shy of equaling those back in March.

For the past week the NYSE new lows were 1002, the highest since 1131 for weekending 7/26/02, which was a time approaching the 10/02 lows--the lowest the markets had corrected from the 2000 highs to that point in 2002. The past week's new Nasdaq lows were only 567, the most since weekending 8/13/04 of 675, but well shy of the 940 at 7/26/02 and the 1097 at 10/11/02 at the markets' bottoms. Last week on the Nasdaq 3285 issues traded, so 567/3285=17.26% hit new lows. At 10/14/02 3938 issues traded, so 1097/3938=27.28% hit new lows at that time.

It appears despite the relative severe correction so far in the NYSE advance/decline and new high/new low numbers, the Nasdaq is rather unscathed.

The NYSE McClellan Ocsillator for past week ended at -344 and that compares to the lowest reading I have recorded of -386 at 9/21/01--which was a good entry point at least for a decent bounce in the markets. The Nasdaq McClellean Oscillator for past week ended at -254 compared to its 9/21/01 low of -365.

Since the recent highs 6 days ago, there have been two days on the NYSE where the percentage of volume and points lost were 90% of the volume up + volume down and points up + points down. Such days have been defined by Paul Desmond, Lowry's Reports, as panic selling days. Additionally out of the past six days, in four the percentage down volume has been greater than 80%, and 3 of the last 6 days have seen the down point percentage all greater that 92%.

I don't have the points data for the Nasdaq, but regarding the volume data since the last high, there have been no 90% down days; however, there have been three days with 87%, 88%, and 82% down volume.

I agree with Burk, these data are very peculiar especially for the NYSE to become so oversold in such a short period of time when there have been such minimal loses in the values of the indices. Richard Russell has been predicting that a "third phase" of the bull market which I guess is fair to say would carry the indices to dizzying heights (not his words), and perhaps the rather serious corrections that have occurred in the markets' internals in the past two weeks will provide a lauching pad for the next ascent.

So what do I think? It is a real dilemma for me. Technically looking at these internals, I think some sort of a bottom should be in place despite the minimal percentage corrections of the indices, yet I have this fear of lows in this coming October, just as I did last year only to have been badly burned by it--missing out on rally since last summer's lows.

If there is to be a rally from the oversold conditions that exist right now, the occurrence of a panic buying day with a 90% up day in volume and points would definitely make me abandon my relatively small short positions and definitely go long. Unless that happens, I will likely stick to maintaining my shorts.

[jk]

Re: 07/27/07 Where is the market going now?

a useful review, jim. thanks.

i noticed that the news on npr led with the dow being down [one of the last few days]. it was the first time in a long time that the market made the main body of the news, as opposed to the business report.

it feels too quickly oversold, like a "fast, furious and prone to failure" correction instead of a real change of direction, unless it's the prelude to a real crash sometime in the next few months.

re: russell - he says the predicted third leg up will bring in the public as big buyers. it's sure hard to see a lot of public buying anytime real soon.

so i think my central case scenario is more of a real correction in the next few months, based on contracting credit and escalating foreclosures and consumer weakness, and leading to losses of 10-20% in the domestic market [more in the emerging markets] instead of the 5-6% we've already seen. an unwinding of risk exposure will also tend to benefit the dollar and the yen. this will lead to renewed talk of deflation. i.e. ka.

that's when the fed will drop rates [having a bit more breathing room from the somewhat strengthened dollar] and kick off a big upleg. [it's so easy to spin these fantasies, and they're worth so little.]

[Jim Nickerson]

Re: 07/27/07 Where is the market going now?

This is what Desmond of Lowry's Reports said in his paper
"IDENTIFYING BEAR MARKET BOTTOMS AND NEW BULL MARKETS"

...a number of general observations regarding 90% Days might
help to clarify some of the finer appraisal points associated with this very
valuable reversal indicator:

1. A single, isolated 90% Downside Day does not, by itself, have any long
term trend implications, since they often occur at the end of short term
corrections. But, because they show that investors are in a mood to
panic, even an isolated 90% Downside Day should be viewed as an
important warning that more could follow.

2. It usually takes time, and significantly lower prices, for investor
psychology to reach the panic stage. Therefore, a 90% Downside Day
that occurs quickly after a market high is most commonly associated
with a short term market correction, although there are some notable
exceptions in the record. This is also true for a single 90% Downside Day
(not part of a series) that is triggered by a surprise news announcement.

3. Market declines containing two or more 90% Downside Days often
generate a series of additional 90% Downside Days, often spread apart
by as much as 30 trading days. Therefore, it should not be assumed
that an investor can successfully ride out such a decline without taking
defensive measures.

4. Impressive, big-volume “snap-back” rallies lasting from two to seven
days commonly follow quickly after 90% Downside Days, and can be
very advantageous for nimble traders. But, as a general rule, longerterm
investors should not be in a hurry to buy back into a market containing
multiple 90% Downside Days, and should probably view snapback
rallies as opportunities to move to a more defensive position.

5. On occasion, back-to-back 80% Upside Days (such as August 1 and
August 2, 1996) have occurred instead of a single 90% Upside Day to
signal the completion of the major reversal pattern. Back-to-back 80%
Upside Days are relatively rare except for these reversals from a major
market low.

6. In approximately half the cases in the past 69 years, the 90% Upside
Day, or the back-to-back 80% Upside Days, which signaled a major
market reversal, occurred within five trading days or less of the market
low. There are, however, a few notable exceptions, such as January 2,
1975 or August 2, 1996. As a general rule, the longer it takes for buyers
to enthusiastically rush in after the market low, the more investors
should look for other confirmatory evidence of a market reversal.

7. Investors should be wary of upside days on which only one component
(Upside Volume or Points Gained) reaches the 90.0% or more level,
while the other component falls short of the 90% level. Such rallies are
often short-lived.

8. Back-to-back 90% Upside Days (such as May 31 and June 1, 1988) are
a relatively rare development, and have usually been registered near
the beginning of important intermediate and longer term trend rallies.

[Jim Nickerson]

Re: 07/27/07 Where is the market going now?

Cheapest Stocks in 16 Years Draw Investors Amid Rout (Update1) http://www.bloomberg.com/apps/news?p...LjU&refer=home

By Lynn Thomasson and Eric Martin 7/29/07

Investors are preparing to snap up shares of telephone, health-care and computer companies after last week's $2.1 trillion global stock market rout left U.S. equities the cheapest in 16 years.
.
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The ABX-HE-BBB- 06-1 index, which measures bonds backed by mortgages with the lowest investment-grade ratings, fell more than 60 percent this year, according to London-based Markit Group Inc., which oversees the index. Banks may slow lending for debt- fueled acquisitions after they were unable to find investors for 5 billion pounds ($10.1 billion) of loans they provided to finance Kohlberg Kravis Roberts & Co.'s purchase of U.K.-based pharmacy chain Alliance Boots Plc.

Philipp Vorndran, who manages $598 billion as investment strategist at Credit Suisse Asset Management in Frankfurt, said subprime defaults won't spread to higher-rated debt and predicted credit markets will stabilize.

``There is a good opportunity to move back to a bullish equity position in a month,'' Vorndran said. ``The stability of financial markets is not at risk.''

[Jim Nickerson]

Re: 07/27/07 Where is the market going now?

Idianov just put this up in another thread, perhaps he is on to something.

And the right answer is... liqiudity crisis caused by China.

IMO, the debt orgy party was crushed back in January, when China announced a 200 billion dollar bond offering priced in yuan to buy foreign reserves for investment. The deal actually happened in June according to Bloomberg reports I have seen at that time. Everybody was excited saying Chinese will start buying stocks and inflated assets throwing money everywhere. But, to the contrary, the buyers of debt paper have disappeared and the rest is history unfolding before our eyes.

Looking back at every stock market correction since 2002, there was never a time when the risk on junk bonds, lbo deals, commercial, and residential bonds have turned up sharply all at the same time before a correction. I am seeing an increasing possibility of a technical crash in stock market in front of us.

I take "technical crash" to equate to a loss of value as has been witnessed in other stock market events (1929, 1987) that were "crashes."

[Jim Nickerson]

Re: 07/27/07 Where is the market going now?

July 29, 2007
Position Update
by Angelo Campione http://www.safehaven.com/article-8066.htm

The chart above shows that we're approaching some major support and if that was to break, then we'd be looking at a crash scenario. This is unlikely for several reasons:

1. As of last Tuesday, the commercial traders (often called the "smart money") held the largest net long position since the stock market bottomed in March 2003;
2. The 200 day moving average is at 1448 and is generally a good long term support point;
3. The uptrend channel that developed from a year ago, is around 1450 and this is support;
4. 1450 - 1460 coincides with the highs from February 07 and previous highs often act as support on the way down;
5. The RSI indicator is approaching an extreme oversold level that has often been a turn around point in the past

In summary, we could get a little more selling this week, but in the short term 1450 is a major support point and a bounce is highly likely. If that bounce happens this week and our system gives a buy signal, then we'll be entering a Put Spread for August also.

He doesn't discuss the MACD, which certainly does not appear to have bottomed. I believe his technical points about what to watch in the coming days are worthwhile.

[FRED]

Re: 07/27/07 Where is the market going now?

July 29, 2007
Position Update
by Angelo Campione http://www.safehaven.com/article-8066.htm



He doesn't discuss the MACD, which certainly does not appear to have bottomed. I believe his technical points about what to watch in the coming days are worthwhile.

Don't forget: Value Traps.

[DemonD]

Re: 07/27/07 Where is the market going now?

I can only speak for myself. I have identified a couple of companies that I find are compelling values (not value traps), and have set purchase orders for them for Monday 7/30.

Tet, if you are reading this, you asked a while ago to let you know when a certain company had dropped into my buy zone. JNJ is there now (below 60/share).

best of luck to all.

[Jim Nickerson]

Re: 07/27/07 Where is the market going now?

I can only speak for myself. I have identified a couple of companies that I find are compelling values (not value traps), and have set purchase orders for them for Monday 7/30.

Tet, if you are reading this, you asked a while ago to let you know when a certain company had dropped into my buy zone. JNJ is there now (below 60/share).

best of luck to all.

JNJ's chart Looks to me like trying to catch a falling knife. Right, good luck.

[Guest]

Re: 07/27/07 Where is the market going now?

Jim -

I can read and understand almost all of your updates! I admire your habit of always presenting views in the most straight-ahead fashion, as plain language and unadorned terms win the most converts.

Dont under-estimate the extent of this capacity, as many exchanges of views on the markets are not altogether clear on these threads. Thanks for clueing in us non-financial types with "feet of clay"!

As for your 'input' from a certain Mr. Russell, I would not be hasty to dismiss that old bloodhound's nose for locating the direction of the market ...

If he's calling for a resumption of uptrend in the near or intermediate future, this would definitely be one of his more gutsy (and acute) calls, as the markets most definitely seem to have reasons to do a face-plant right about now.

[Jim Nickerson]

Re: 07/27/07 Where is the market going now?

Jim -

I can read and understand almost all of your updates! I admire your habit of always presenting views in the most straight-ahead fashion, as plain language and unadorned terms win the most converts.

Good, Lukester, I am not trying to win converts however. Plain language without too many metaphors, or any, is to be desired when writing about financial things. So much gets written on iTulip that is to me obscure in its meaning, and not necessarily always because of deep financial meaning, but rather because of what appears to me to be poor choice of words, or individuals' apparently wishing to be oblique in whatever meaning might be conveyed. It is as if despite their anonymity, they are still fearful of stepping up and making a concrete statement.

Dont under-estimate the extent of this capacity, as many exchanges of views on the markets are not altogether clear on these threads. Thanks for clueing in us non-financial types with "feet of clay"!

As for your 'input' from a certain Mr. Russell, I would not be hasty to dismiss that old bloodhound's nose for locating the direction of the market ...

If he's calling for a resumption of uptrend in the near or intermediate future, this would definitely be one of his more gutsy (and acute) calls, as the markets most definitely seem to have reasons to do a face-plant right about now.

I did not intend to imply that Russell has written that the 6-10 day downturn is a prelude to his predicted 3rd phase of the bull market. Over the past weeks since he has become bullish based on Dow Theory, he has just mentioned the notion of a 3rd phase. It now seems to me on down-days he is quite hesitant about the continuation of the upward moves that for the moment stopped 6-10 days ago. I don't take his recent notes as his calling for a resumption. He writes he is just waiting for the market to demonstrate whatever it is going to do--which is about as oblique a comment as anyone, anywhere ever makes. In other words, I take him to be writing he has no idea as to what is going to happen, which he in fact sometimes actually writes.

[Tet]

Re: 07/27/07 Where is the market going now?

I can only speak for myself. I have identified a couple of companies that I find are compelling values (not value traps), and have set purchase orders for them for Monday 7/30.

Tet, if you are reading this, you asked a while ago to let you know when a certain company had dropped into my buy zone. JNJ is there now (below 60/share).

best of luck to all.

Thanks for thank, I might have to pick some of that up.

[c1ue]

Re: 07/27/07 Where is the market going now?

My 2 cents:

No major action either way unless there is another significant negative news. The Chrysler failed securitization was the big one last week in my opinion.

The negative side: All the money sitting on various companies waiting for LBOs, that is now out. The free money train has stopped since banks are now force to hold most of their junk paper - even were they so inclined, the banks are restricted by their (pathetically low) reserve requirements.

The positive side: The massive loads of credit created are largely still around. Sentiment does not get turned around so quickly without a clear track failure of the gravy train - lack of financing doesn't scream 'sell everything', it just says no more dart-throwing at LBO candidates. The other games are still afoot: borrowing money to buy back shares, etc etc.

[DemonD]

Re: 07/27/07 Where is the market going now?

JNJ's chart Looks to me like trying to catch a falling knife. Right, good luck.

lol jim. If you want a falling knife, check out AHM. Or almost any homebuilder for that matter.

JNJ is an international conglomerate who's products are in the "need" category more than in the disposable income luxury category. They are a dividend achiever company (raised dividends every year for the past 10 years or longer), and have been publicly traded since before 1929. In my purview, any company that pays steadily increasing dividends, has needed products, and has shown the strength and stability to come out of the other end of a depression is worthy of my money. The question is not if, but when to buy a company like this, and with a p/e ratio bumping down on historic lows, with earnings still growing and even conservative earnings projections it looks undervalued.

My only concern with buying JNJ right now is my overall fear for the US stock market and economy. And my only fear is that it will go lower so that I might have been able to buy an extra couple of shares. This fear is tempered by a Buffett phrase I've seen kicked around recently: "Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."

I'd be kicking myself more for missing the chance to buy JNJ than on the more rare chance that we will see a repeat of 1987; and even if we do, i fully expect JNJ to hold up better than most of the market and recover quicker.

[Tet]

Re: 07/27/07 Where is the market going now?

lol jim. If you want a falling knife, check out AHM. Or almost any homebuilder for that matter.

JNJ is an international conglomerate who's products are in the "need" category more than in the disposable income luxury category. They are a dividend achiever company (raised dividends every year for the past 10 years or longer), and have been publicly traded since before 1929. In my purview, any company that pays steadily increasing dividends, has needed products, and has shown the strength and stability to come out of the other end of a depression is worthy of my money. The question is not if, but when to buy a company like this, and with a p/e ratio bumping down on historic lows, with earnings still growing and even conservative earnings projections it looks undervalued.

My only concern with buying JNJ right now is my overall fear for the US stock market and economy. And my only fear is that it will go lower so that I might have been able to buy an extra couple of shares. This fear is tempered by a Buffett phrase I've seen kicked around recently: "Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."

I'd be kicking myself more for missing the chance to buy JNJ than on the more rare chance that we will see a repeat of 1987; and even if we do, i fully expect JNJ to hold up better than most of the market and recover quicker.

Thanks for the tip I bought in at $59.85 looks like a pretty good deal to me.