The Market Perspective

The Turn Gets Underway

Wed August 24, 2011

Note to readers, we added some comments to our last post since originally putting it on the blog. 

Market Bets on FED Miracle - This is the headline on the front page of today's WSJ. This is of course the usual attempt by the media to link some news event with what is perceived to have happened. Yesterday stocks went up, that's good, so the media links it to a rumored announcement from Jackson Hole, WY. In truth as we show in the graph below, for whatever reason, the net sellers to buyers are drying up, the ratio is turing the other way. Rely on factual data, not media speculation for your investing decisions. 

The markets are putting in the low we have expected. And we are getting confirmation that indeed this is not just a correction but  CHANGE in trend. Most economists, always late to the party, are still debating whether we will get a double dip. The clues continue to mount, at this point there is little doubt it will happen. 

NASD Summation Index

The NASD summation index is the main chart. Note it has registered a lower low than last summer. This is a massive divergence and indicates a trend change. 

As I was writing I spotted what appears to be the same five wave patterns we have shown in price and various internal indicators. This is not Elliott perfect but makes the point that a fifth wave should be bottoming now. We have lately used Elliott for the simple reason that this theory has high value when the overall social mood is strong. With multiple 400 point swings, up one day down the next, mood has been especially strong. And as the media has broadcast useless nonsense about panic, buying for the long term, etc. we wanted to make the point that in spite of what you read and hear, there is a coherent pattern to what is happening. Note that the Moody downgrades of Japan has come at the END of the fifth wave, a typical negative news event to end a pattern. 

Oh, notice that the actual index at top, the QQQ, did not collapse until after the top of Wave Four in the NASI!  This is why the public is fooled by looking at the price index instead of what stocks in total are doing. 

At top note that the QQQs (the NASD 100) have registered a higher low in price. This is clearly not supported by the internals. We therefore have fewer stocks holding up the  average to their weighted importance. I have purchased the QQQs around 51 for my own accounts. 

At bottom the MACD does appear to be bottoming. It has not quite turned up but is getting closer all the time. 

So as the summer ends, various fifth waves are also coming to an end. The fund mangers should return after Labor Day and not doubt the retirees that sold the last two weeks will suspect that JAWS is out of the ocean about the time QQQ hits 55, and they will buy. As always......

Thanks for reading the Market Perspective, we hope it has improved your investing results. 

Desperados, Waiting for the Train

Tuesday Aug 23, 2011

 The bearish formation of the market since Nov -  February is clear in this chart. Recall that Emerging Markets peaked last November and we stated the US Markets peaked internally in February. Since then we have lower highs and lower lows in the number of stocks over their 50 day MAs, a bearish sign. The Stock indices were going higher on less and less participation. Such situations always end with a collapse, there are not enough stocks holding up the market. And many, like OPEN, are absurdly high priced. 

This indicator has now hit the same low registered last summer, virtually no stocks are over their 50 day MAs, and so the selling should be exhausted. For a market to advance, the sellers have to give up, and the buyers take the day.  But one can only see the progression by looking at the internals of the market, simply knowing where the DOW closed is of little help. 

The market is bottoming, see our post early this morning, I hope you jumped aboard the bullish bandwagon?

 

Much more tomorrow morning but ...compare this to last summer,the big move up is at hand, we hope you have been buying while the rest have been selling..

Correlations

Tuesday August 23, 2011 3:48 AM CST

TLT versus SPX

There is an inverse correlation between SPX the gray line representing stocks and the red black bars representing TLT, the flight ot safety in bonds. Look closely and you will see the rally in bonds is petering out. The RSI is getting weaker at top and the MACD is rolling over at bottom despite the fact that the price of TLT is still high. 

As I write very early in the morning, Asian markets traded up and European markets are up a healthy 2%. So perhaps we have seen enough selling in retirement funds that the fears of breaking 1100, mine at least, are over done. Either way if we do break 1100 that should not last long. 

Some of my limit buy stops got hit yesterday and then the stocks re bounded. Lady McBeth and I are staying the course, you should too. 

We are at or near an important intermediate term bottom that should be bought. 

The End, A Bang or a Whimper?

Monday after market close Aug 22, 2011

Macb.        If we should fail?	64
Lady M.        We fail!
But screw your courage to the sticking-place,
And we’ll not fail.  Macbeth, Act I Scene VII William Shakespeare (1564–1616).  The Tragedy of Macbeth. With the S & P only 20 some odd points above 1100, as I mentioned last week, it seems oh so likely that the floor traders will manage to run the market under 1100, trigger the sell stops, witness a waterfall decline, then run in to scoop up the bargains and bingo, the market low is in, and it runs right back up. That is the way the third wave ended last week.  I'll be up in the morning with a comment. I looked at the various indicators. And all the charts suggest that we just need an end to the fifth wave down to totally discourage those still long in the market to abandon hope, which is what the market wants you to do, right when you should be buying.

 

Blood in the Streets

The Time to Buy is When there is Blood in the Streets

Baron Rothschild

You can google HPQ and access any article or go to www.wsj.com for articles on how poorly HPQ has launched its latest strategy. The articles suggest that 

- HP has downgraded the value of the PC division it wants to sell by revealing its strategy

-HP paid way too much, maybe $8 B for the British software maker

Well in my opinion Carly should not have bought Compaq at all whatever she paid for it. But, no doubt HPQ has not played its hand well here. But click on Baron above and read the article. 

Do you seriously think HPQ would be the cheapest in six years if the news was good? Of course not, the bargains are always when the news is terrible, ala March 2009. 

Actually all this negative press is wonderful for the contrarian investor, perhaps the price of HPQ will go even lower!  I have made the point that absurdly overvalued companies like LULU, OPEN, or Chipolte Mexican Grill were far too high to justify purchase, particularly when the insiders were furiously selling shares as fast as their option grants came due. 

Now we have the opposite situation. A great company executing a poor PR strategy while probably doing the right thing in the long run. 

Do your homework, don't buy anything on just my advice, or the Baron's.  But again the best buys are quality companies when everyone else is selling. 

Watch the Internals, Not the External Headlines

Saturday August 20, 2011

Friday the drop in H-P took 45 points off the DOW.  Shares dropped 20%.

IBM slumped 3.8%. H-P and IBM combined to account for more than half the  Dow's decline on Friday. 

Friday's Markets Page B 1 Weekend WSJ

As we regularly preach here at TMP, one needs to look behind the index reports to see what is happening to the internals of the market. We now know that half the fall in the DOW Friday  came from perhaps the two most famous high tech giants in America. 

Now before we go on, and yes I will be going on today, here is a reading and viewing assignment for you. 

Reading Assignment

Marc Andresseen is co founder of Netscape, remember that one?  His Why Software is Eating the World

goes a long way toward explaining what is happening beneath the surface of the headlines, all of which are well into fifth waves of  gloom and doom. 

Viewing Assignment

Pirates of Silicon Valley is a must see for anyone wanting to come to grips with the high tech revolution. Notice by the way this one rates a 5 star rating by 98 reviewers, the rest give it a four star. While it is the story of Gates and Jobs and the personal computer, it is really the story of the rise of software. The key scene when IBM assumes the money is in the hardware, and grants Gates exclusivity for the what would become MS DOS is key. Gates went on to become filthy rich, IBM had to re-make itself in the 1990s. Today IBM is very much  an E Business advisory company, they sold the rights to their laptop in 2005 just as HP is doing now. 

So What is TMP Getting At?

Glad you asked. Bear markets are all about discarding the last generation ideas, think giant garage sale. At the end the bear embraces the new ideas, think GM goes to China. HIgh tech is  undergoing just that. 

Borders bookstores  will liquidate this fall. Barnes and Noble plunged 17.5% Friday (see page B 1) as its apparent $1 B market cap is now $577 million. (See final photos and comment at end).  Andresseen notes that Barnes and Noble ceded online book sales to Amazon in 2001, and is now paying the price for that error. can you say, who is Chrysler?

H-P is looking ahead (have you read Software Eats the World or did you skip it thinking I would fill you in, come on now, go back and click). H-P wants to ditch the commodity PC business to invest in software. Google bought Motorola's Mobility to get more into portable software. The markets reacted with yesterday's thinking and dropped the value of both, big mistake. 

One of my themes on the student blog (www.professorelam.typepad.com) is the importance of design. The best example of design combined with software innovation is the literal explosion of apps for the iPhone and iPad, I just checked, is that a mistake on the Apple website, over 425,000 apps, in what, the last couple of  years?  No wonder H-P wants out of the hardware business!

Recall IBM's original moniker - Machines should work, People should think. Software does just that. Every university now exists on e mail, electronic bulletin boards like Blackboard, and electronic homework that grades itself like Connect from McGraw Hill, Cengage Now form Cengage, or Myaccountinglab from Pearson. This has all happened since 1999! Holy Fast Forward Batman!

The drop in price for the companies switching from yesterday's hardware focus to today's software focus is strictly rear view mirror thinking on the part of the markets. Oh my longer term view has not changed. We are still in for rough sledding the next two years. But as that happens there will be significant high tech changes that prepare the winners for the brave new world of the next bull market, think 2018-2036.

In similar fashion the 1930s saw some important high tech innovations begin, many that would take until the next bull market to flourish. Television was a 1930s invention but it took the 1950s economic expansion to make it mass affordable. But consider

Radio broadcasting

The DC-3 completes its required flight  paving the way for affordable passenger service

Automobiles gain hydraulic brakes, roll up windows, and overhead valve engines, the modern auto is born

The World's Fair of 1939 displays freeways and other marvels.

WW II sidelined consumer products but Detroit really went to school on mass production

Doug McArthur was living in an air conditioned apartment in the Phillipines when WW II broke out 

Think about it, air conditioning made the Sunbelt as much as Right to Work Laws.....again air conditioning was a bear market invention that had to wait for the good times of the 1950s bull market to be affordable to the masses

Panic Mode

Only four Dow Industrial stocks were positive Friday

no Dow Transports

one Dow Utility, barely

Now suppose I told you that we could hop in our Time Machine and, hey, we don't have to wait for a return to the March 09 lows, we can buy a well known well capitalized high tech with a track record of getting it right all the way back to the days of the transistor, and it is as cheap now as it was in March, 09. Okay would you buy it?  Have you completed the required reading yet, see above?

H-P

 Tech Analysis - Panic mode, OBV hits prior low, RSI at top hits lower low than in March 09, one fourth of market cap ($12 billion for those of you counting) wiped out in one day, gee do you think sell stops were triggered

Fundamental Analysis, - Hmmm, EPS of $4.07, Price Earnings of 5.8 (uh, is that a misprint at finance.yahoo, no?), total cash flow negative last year due to buying back $8.5 B of their stock, cash flow from operations both quarterly and annually, is simply astounding ....Oh and now there is a rumor that Oracle might try to buy HP, you can bet it will be for well more than $23 if that happens, but I digress, did I mention HP is now run by the former head of software maker SAP (SAP software is so important that our university now teaches it in our accounting and CIS classes), and at this price it is trading barely above book value of $19.48!

Seriously even through the downturns the last three years,  the cash flow from operations exceed, gulp, $12 B  a year, and last year was the lowest of the three past years!  So HP spent one year's cash flow to buy the British software maker Autonomy. Frankly,former President  Fiorino's decision to buy Compaq never made sense to me, why make computers when one can sell wildly profitable ink cartridges at insane profit margins? PCs and Laptops are now a commodity like the five pound sack of potatoes, on sale at WMT and marked down to corporations in exchange for selling online storage and other services, no wonder Lenovo is a Chinese company (recall that Lenovo  owns the former IBM thinkpad laptop rights)  HP is now doing what IBM did several years back, jettisoning the lower profit laptop business.

This then is a sneak preview of what the overall market will look like at the final bottom. Wonderful companies with great track records and solid earnings are cast onto the trash heap like yesterday's dot.coms. 

Strategy

Finance.yahoo shows the Nov 18, 2011 25 HP puts at 3.20 on the close Friday

The same series of calls are 1.74, though there appears to be some sort of misprint, how can there be an open interest of 60 and a volume of over 4,000?  At any rate, the calls are cheaper than the puts so

One can sell the 25 put for 3.20  and buy the call for 1.74 and pocket 1.46 or buy another call. So one gets the upside until November 18 for nothing on as many as you want to buy. Yes you are obligated to buy HP for $25, six bucks above book value. I'll take that deal any day. Or you can control 100 shares of HP for three months for $174, not a bad bet. Or buy the stock at $23, it even pays a 1.6% dividend or so, better than the bank.  As always evaluate your own risk preferences and never buy to excess. 

What would Larry Ellison and former HP CEO Mark Hurd hope to do? Recall that Boone Pickens made several fortunes in the take over game of the Milken era, and never bought a single company? It works like this. 

You spot a company that really does not want to be taken over. You ( and your new friends) quietly amass a huge bet on the stock buying out of the money call options, here say the November 30s. Then you announce a take over bid for say $35.  You take out full page ads in the WSJ proclaiming to help the common stockholder, a victim of foolish management schemes which tanked the stock.  Bingo the stock is in play. Management immediately denounces the offer as absurdly low, which it is. You of course are denounced as a corporate raider.  The stock zooms to $35. Other hedge funds smell money in the water, they begin buying stock. Rumors swirl that the Board is adopting Golden Parachutes for existing execs, analysts proclaim the obvious value noting HP was 47 in January. And so, whether the Barbarians at the Gate get the company or not, their investments in the stock soar. At some point the game ends, HP is either bought or acquired or fights the suitors off and the stock is back up, bingo everyone wins. Understand all this is hypothetical but that's pretty much how ever 'takeover' Boone staged ended. 

If you have not read Den of Theives, put that on your to do list. Author Stewart won a Pulitzer for it. 

Stock Internals

 Despite a lower index value, the percent of stocks above their 20 day MA is higher than last week. This is the sort of divergence one would expect prior to bottoming action. But again, do not discount the possibility of a spike below S P 1100 which would trigger sell stops under the August 8-9 low at 1100. That would be a washout. Unless you have buy orders at such levels in prior to such an event, you will not get to scoop up the bargains, they won't last long. Go back and look at just how brief the stay was at S P 1100 August 8-9, one hour. 

Bonds

JNK at 37.86 is well above its low of 36.50. We showed the spikes in TLT and VIX yesterday.

Energy

Crude oil looks to have some support at 80 from last fall. Friday was actually an up day after the $5+ drop Thursday. It would have to close under $78.30 on the end of a day to flash a sell signal. Yes it could be we are quite oversold, see MACD in lower panel.

 

Currency

Despite all the 'Dollar at Record Low against the Yen' the dollar continues to from a multi year bottom displaying remarkable calm throughout all this volatility. 

Betting on Yesterday

Nice building eh?  This is the Alon Center in San Antonio, a very upscale shopping and office complex, at least that was the original idea. You see this is, several years after its construction, an empty building. Yes perhaps the most upscale HEB grocery in town is across the parking lot but...still not takers in this very affluent upscale area of America's seventh largest city.

 

 

 

 

Trendy eh?  Note the clever (think green!) overhangs to shield the sun. The idea was for retail on the first floor and offices above that on the second and third floors. Admittedly to the left, not shown, the rest of the shopping is slowly filling up. But the signs that Barnes and Noble was coming have gone up and down,  twice now.

 

 

 

 

 

 In the bleak days of 1986 post oil crash Texas, these sorts of buildings were known as 'see thrus', and yes, one can see right through to the other side of the building!  If you can think of a realistic renter, drop me an e mail, the leasing agent would love to hear from you.

Brick and mortar is so yesterday,  my point is that this is what HP is getting away from, selling hard goods at the retail level. Like IBM six years ago, HP is seeking to move to Intellectual Property, after all, 

It's Eating the World......

 

 

Final Note, An alert reader just pointed out that his wave count reduces the chance of another low this next week, I have allowed for that possibility in my analysis but either way, the low should be at hand. 

Could the whole thing fall apart and drop to 1,000 or below, on the S & P, yes, would I expect that to last long, about as long as S & P 1100 lasted. But that could happen. 

 

[email protected]

 

 

The Market Perspective bases its information on techniques and sources that have been found to be reliable in the past, and The Market Perspective tries to base opinions on sound judgment and research, however, we do not guarantee that future results will match past performance and no guarantee can be made that advice will be profitable. The Market Perspective accepts no money for stock recommendations and is purely motivated by its own research in recommending any stocks.  Put another way, the responsibility for decisions made from information contained in this letter lies solely with the individuals making those decisions. The editor and persons affiliated with The Market Perspective may at times have positions in securities mentioned.  Nothing contained herein represents an offer to buy or sell securities. The Market Perspective encourages investors to be diversified, and to maintain sell stops and risk control over their valuable investment capital.  No guarantee can be made to the accuracy of text or charts.

 

 

Fifth Wave Finale

Saturday August 20, 2011

 Summary

There are numerous qualitative and quantitative clues that suggest we are quite near  a bottom before a powerful rally develops. This will of course astound those that exited when they should have been buying. 

• Corporate insiders continued buying throughout the week, far in excess of corporate selling. The insiders are always right, sooner or later. 
• As noted in  a previous post this week,  amateurs exited funds in record numbers not seen since 2008. 
• The twin fear indices, VIX and TLT hit the same high marks seen at the last panic lows in the stock market. 
• One can sense a fifth wave unfolding by means other than  the wave count. Friday on lower volume, the indices were lower but many  internal measures  (number of new lows, percent bullish, etc) did not register a new low.  Fifth waves do not exhibit the intensity or breadth of third waves. Often there are more new lows at the third wave low than the fifth, that is the case thus far. 
• next week is the final week of the summer doldrums of slow trading. That is a perfect set up for a fifth wave low. With a closing low of 1123, I would not be surprised to see a close below 1100 this next week, see our post a week ago where an analyst on Yahoo said his stops were right under 1100. That would give us a suitable final washout for a fifth wave low.

 

An Anecdotal Story - Primal Fear

Several teenagers wandered onto a railroad trestle. The track was well over 20 feet above the dry wash below. And so, a train appeared, bearing down on the barely attentive teens. They were one third to near half way onto the trestle. Only two did the right thing. Given the speed of the train, they realized they could not outrun the train, the only course of action was to run toward the train, traverse the shorter distance between themselves and the train and get off the trestle. They did. 

The others reacted just as their ancestors did when facing a charging saber tooth tiger or mastadon, they ran away from the danger. But their ancestors were not on a trestle. Without a tree to climb, they had to outrun the train, an impossibility. And so, they died running in the wrong but understandably emotionally logical direction, away from the immediate danger. Regrettably this is a true story. 

Fast Forward to Stock Trading

Millions of American have their life savings in the stock market. But few have done the necessary study to react in the way they should. As the previous example shows, we are hard wired to run AWAY from danger. This is understandable. But investing is an oxymoron. One has to run against the herd when we all have thousands of years of survival instinct that we must run with the herd, or die. 

The same investors will flock to annual 'no sales tax weekends' before the school year begins to purchase new clothing for their kids at lower prices. But faced with lower prices caused by a waterfall decline in stock prices, they do the opposite-run the other way or sell instead of buying. Granted it requires reading books, studying price patterns, being able to recognize classic panics, and then acting on the information in the correct fashion. But most people do not do this, they herd with the crowd. Or they listen to 'experts' who suggest diversifying by purchasing nine different funds that actually all do the same thing, go long the market in so many ways that they simply replicate the markets. 

Most folks are influenced by their most recent negative experience. And remembering the fall in stocks in September of 2008, they sold this past two weeks, fearful of a repeat of Oct-Nov, 2008. We will have numerous stair step declines, drops in price, and then furious rallies on the way down to the bear market bottom in the net two years. This is however by the same measures of last summer, an extreme, worth buying for what should a two month rally. 

The Fear Index

This will be our 'chart of the week'! 

• The main chart is the VIX, the Volatility Index that registers net put buying, a bet or fear of ever lower prices. It peaked last summer and this summer at the blue circles in the main panel. Notice it was higher last week than this, typical for a third wave last week. 
• At top is TLT a fund of long term US Govt Bonds. During panics investors will engage in what is termed a 'flight to safety' by dumping stocks and buying bonds. As you can see it is way too late to be buying bonds now, we sold most of our holdings of TLT at 105 a week ago. Okay so we didn't get the top price!
• At bottom rather than the index itself, we posted the number of stocks trading over their 200 day moving average. This indicator threw the chart for a loop but one can see that it hit a low after fear peaked.  Indeed the low last summer was the orange circle in July. 

So we have reliable historical evidence that the markets are repeating expected patterns which fit a stock market low that can be traded profitably.

Five Waves Near Completion

This same pattern can be seen across multiple indices and large stock holdings. It is classic textbook Elliott. Elliott Wave Theory works best when the social mood is strong and lately that has been the case. I labeled the waves in the main panel as well as the top panel for On Balance Volume. Earlier this week we posted, Where is the Fifth Wave, and then got our answer Thursday. Note that we are not wedded to one particular analytic method but try to use what best suits and fits the market. 

At bottom note that  volume peaked on the Third Wave low, just as it should. The Fifth Wave we are in now exhibits lower volume, but lower price, most of the selling is done. And as we said, the market could easily take out 1100, and trigger the sell stops under that level as the Purple Crayon article suggested a week ago. 

New readers would do well to read all the entries for the last three weeks. 

Therefore we expect a final Fifth Wave low this next week, and it could bring yet another spike if it triggers lots of sell stop orders. This will really make the buy and hold crowd nervous. I got an utterly useless 'Market Central' update page from one of the large fund families today. Lots of advice but no analysis of what has happened and why, it is not random walk and it is not chaotic but patterned. 

Socionomics

Consider this capsulation of a new movie, Griff.

Griff is a meek customer service client by day, lion-hearted, troubled superhero by night. What are the right words to reassure victims but put fear in the hearts of criminals. What is the right look for a super suit? What are the right weapons for fighting crime. What is the line between stalking and neighbourhood watch. Are super powers something that you can invent by believing in yourself or by others believing in you. Griff's DIY approach to the modern superhero is challenged by meeting a woman of equal imagination, vision and determination. A funny and smart film with great chemistry, top secret package delivery, and real imaginary special effects. Because the problems of invisibility require special solutions.

Hmm, sounds like Superman without the super confidence! I honestly don't quite grasp what 'real, imaginary' means but hey, this is a movie, right?

The original Superman debuted in 1937 to a nation weary for a super hero who could turn things around. This movie seems about right for a metrosexual superman, worried about his outfit, weapons, and whether he is really super or just imagines that to be the case. This is the perfect metaphor for 'leading from behind' our current foreign policy.  A Superhero engaged in self doubt, Alan Alda in blue and red tights, what else?

Elsewhere Fright about vampires terrorizing teens is billed both as horror and comedy. That would be about right for a transition to a bear market.While economists are only now suggesting that a 'double dip' (why economic disaster is couched in friendly ice cream adjectives is beyond me), most people still reject the possibility. So this film is an appropriate mixture of horror (another stock melt down, bank failures) and comedy (naw, just kidding, the Dodd Frank bill fixed all that!). Given both comedy and horror, it should resonate well at the box office. 

Finally, we have a re-make of Conan the Barbarian. The original came out in 1982 at the end of that bear market. It is hard to imagine anyone more fitting for the role than Arnold in his prime but, sword and sorcerer movies and books are quite the rage now, note our use of the word rage. A hero amidst violent times who overcomes incredible odds, yep, that's about the way investors in the market as well as protestors in Syria see themselves, both could use a Conan on their side!

Day of Rage

And coming to Wall Street Sept 17 we have a Day of Rage. Organizers have targeted J P Morgan Chase bank and would really like to put it out of business. This is of course ironic in that most of the SEIU pensions are no doubt invested on, yes, Wall Street. But such are the vagaries of social mood. We have been preparing you for more and more violent social unrest, now its on Wall and Broad. 

 

Thanks for reading The Market Perspective. We sincerely hope it has been of assistance to you in these seeming tumultuous times. 

More later this weekend, we thought you would enjoy this wrap up early in the weekend. 

 

 

 

 

 

All Quiet On Options Expiration Day

Friday August 19, 2011

It appears that the stop sell order trigger soaked up the selling yesterday. Things have been quiet all day. However we remain pretty much where the markets closed so one can still go shopping. 

Typically things do not pick up until the fund managers return after Labor Day which is another week off. 

What a difference a day makes in mood It does look like most of the action yesterday was in the early going with the market selling off sharply as it dropped through 1180. 

The markets did sell off into the close but I attribute that to rolling over at options expiration today to the next deadline. We may see a secondary low this next week just as it took a while from the low November 8 to go up to that fourth wave and then wander down as though no one cared to March 9, 2009. And next week is the last week of summer doldrums, so we may have some more opportunities to shop!  Place your orders even spaced at and progressively lower levels. 

What happened last week was the memory of 2008. Many individuals sold their holdings, no doubt at a loss, fearing a repeat of the giant slide ala 2008. It's too early for that yet!  As I have stated again and again we will stair step down with intermediate bottoms followed by furious rallies. The losers sell into the declines and then see the market come back up, just as it did into May of this year. Each time they will assume the coast is clear and buy back. The market will hold up long enough for them to get comfortable again, and then another decline will take place. This will be repeated again and again, until of course we have a final crash. At that point everyone will swear off stocks just as they sport single digit p/e s and 6% dividend yields. And that will be the bottom. 

Friday Pre market Opening

Friday August 19, 2011

Investors pulled a net $23.5 billion from U.S. equity funds in the week ended Aug. 10, the most since October 2008, when markets were reeling from the collapse a month earlier of Lehman Brothers Holdings Inc., the Investment Company Institute said yesterday. The period tracked by the Washington-based trade group included three of the unprecedented four consecutive days in which the Standard & Poor’s 500 Index rose or fell by at least 4 percent.

Bloomberg August 18, 2011

One can get a good sense of what the 'average' investor is thinking in this article. Click the link and read it, please reflect on the  state of bewilderment both the writer and those interviewed are in. Now contrast that with what you have read here for the last year!  One person states that 'there is reason for the market to be acting this way except for the government.'  TMP has of course detailed the reasons for the market acting this way over the past year, it was just a matter of when. 

Crashes

Downturns end in crashes. That was the case in 1987 and 2008. After extended periods of decline, once the few stocks still holding the averages up collapsed, waves of selling among panicked investors took the averages to bargain levels. Like the fellow interviewed in the article above, most investors have been oblivious to the danger of falling emerging markets, declining internals, overvalued real estate, etc. And now many are selling at what should be a good intermediate term buying opportunity. 

If you think about it

stocks are crashing but 

bonds and bold are crashing in reverse, making parabolic highs while stocks make parabolic lows. This makes perfect sense, the same group doing the wrong thing selling stocks here, is doing the wrong thing buying bonds after TLT has moved from 89 to 110!

 

Europe and Asia followed America down but as I write at 7:10 AM CST Britain is down 1.75$ and France -1.42% well off the worst of their day. Here the NASD and S & P have both pared overnight losses with the S & P down 8.7 points. 

Market Internals

A five wave pattern is also evident in the S & P bullish percent index. I would expect it to hold above last week's panic low on August 8. Fifth waves are marked by lower breadth of participation as some buyers come in and most selling was exhausted in the third wave. IN the lower panel note that the MACD is trying to curl to the upside. 

Bob Prechter has been on several media outlets but I find hardly anyone discussing what is in fact a pre ordained pattern of social behavior in the markets. As I noted yesterday afternoon, one fellow on Fox  was actually getting more negative on the SOX index now, see yesterday's post. We hear words like 

panic, bloodbath, investors getting mauled, but virtually no one other than blogs like this has had a reasoned explanation for what is going on. 

Well we hope you have benefitted from reading The Market Perspective!  We attempt to make complex financial matters easy to understand. 

Investor Psychology

It is hard to imagine anything more ironic than LBJ's domino theory next to the fact that today we can invest in Viet Nam via an ETF on the NYSE. But, this picture shows how small investors rush in at the wrong time. At top the On Balance Volume has been declining since the ETF was introduced. The volume peaked just when we showed you that Emerging Markets had peaked last November, see green bars in middle pane. Shortly thereafter, MACD peaked early this year and never looked back. VNM now trades at
54% of its all time high at 31. Notice that amid the giant sell off yesterday, VNM rose in price, hard to see as the black bar has a volume spike behind it.  It rose .74%. Viet Nam and other Asian countries have benefitted from higher labor costs in China. 

The Auction Market - Sotheby's BID

Sotheby's is a literal socionomic window on investor optimism (April) and fear (now). It is trading at 59% of its April high. Sotheby's is of course one of the two premier auction houses, its fortunes ebb and flow with the preference for 'investing' in all sorts of art objects and collectibles. And it has real estate exposure. My point is that the most beaten down stocks, and here are two great examples, probably offer the best percentage bounce on a rebound in the markets. Yesterday appears to have been a bear raid tripping sell stops from those that bought last week. 

Sell Stop Orders

A week ago, Friday August 12, I suggested that massive sell stops at 1100 would likely trigger a sell off. The only error was the level. Clearly many investors who bought last week on August 9 at 1100-1120, placed sell stop orders right under 1190, and bang, we got a waterfall sell off as a result. 

Investors and readers should make their own decisions about what is appropriate for their investing risk profiles and time horizons. Caveat Emptor!

I will be making comments today on the blog. And just to really make things interesting, this is an options expiration day which could swell volume!

 

 

Fifth Wave In Progress, Chicken Little Panics

Thursday August 18, 2011

Post Market Close

I was exercising ( and frankly relaxing after a hard day shopping on Wall Street) on my recumbent Schwin 203 watching the various business channels after the market close today. I have spent this past year readying myself, and hopefully the readers of TMP, for these rare chances to scoop up  bargains while others are in panic mode. Bear markets feature amazing sell offs followed by furious rallies.  A regular on Fox Business, apparently not a TMP reader, could only talk gloom and doom about the semiconductor index. We have regularly featured that index as an indicator, but we have been tracking its decline for months. Now, the expert is worried. Apparently he does not understand Elliott Theory.

SOX

Honestly this would make a nice graphic for an Elliott Wave textbook. The five wave pattern has unfolded in textbook fashion. Wave three is the longest. Wave Two exhibits alternation with Wave Four. Wave Two is sideways, Wave four is a sharp rebound. Wave Five kicked off with a violent down move. I expect SOX will fall below the previous Wave Three Low. 

NASD 100 QQQ

Readers will note that this week I said the pattern is still there, where is Wave Five?  We got our answer today!  Wave five is underway. Hopefully you read our pre market notice this morning.  Note at bottom that the MACD looked to be bottoming. Such is the nature of fifth waves. Once everyone has decided the coast is clear, during  a Wave Four, the market plummets again. Recall the headlines, DOW regains all its losses of the past week?   Yes that was true but that only accounted for the last of the third wave. The overall market was still below its previous highs. 

Daily Advance Decline NYSE

Theories are only good if they work across multiple horizons. Here we see the same five wave pattern. 

 

So , we have an indication that a fifth wave is underway in 

the SOX index

the NASD 100 or QQQ

and in the Daily Advance Decline Index. 

We cannot know where the ultimate low is, the idea is to scoop up bargains by placing orders to buy lower and lower. Using my suggested list of buys that I posted here last thursday, yes we bought today. But we may well see lower lows, and more declarations of the end of the world (Neal I have been talking with the big money boys and they see the SOX index collapsing and the DOW at 10,00, uh, tomorrow...noted Fox Business analyst) but this is the time to judiciously place orders to buy during the fire sale. Be careful as Wal Mart warns, falling prices abound, do not be bashful in placing orders where you would really like to buy!

 

Yes expect a pre market comment in the morning, this is just too much fun to resist!