By Sol Palha | 1 November 2007
— Francis Bacon 1561-1626, British Philosopher, Essayist, Statesman |
The Markets were expecting a quarter point rate cut and that’s exactly what the Feds gave them; as this rate cut is somewhat priced in [[at least it's what the "smart money" was expecting: normxxx]] it is probable that the markets might suddenly pull back here. Note that Wednesday's volume, though somewhat higher than in the last few days, was not extremely high and this suggests that most likely this rate cut was already priced in; it also suggests that the smart money was sitting on the sidelines and watching the show.
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Recent market action reminds us of foot prints in the sand; as the tide rises it washes away these footprints and so on the next day it would appear as if no one had trodden on this beach at all. This unfortunately is the way the minds of most investors work. One day they are bullish and then a wave of panic hits and they forget why they were bullish to begin with; then they turn bearish and when a wave of good news hits they forget their reasoning for being bears and so goes this sorrowful dance of death until the player is either dead or destroyed. Sadly to say most individuals also live the greater parts of their live in the same way; as the way one behaves and reacts in the markets is nothing but a reflection of ones personal life. The market in effect is nothing but a reflection of the mass mindset in action; one that is plagued by constant worry and very little pleasure.
Two weeks ago the Dow corrected over 570 points and immediately the penguins jumped from the euphoric boat to the boat that is filled with gloom and misery. They began talking about the same gloomy news that was being broadcast when the Dow traded all the way down to 12500; higher energy prices, housing problems, liquidity problems in the credit markets and all sorts of other junk. 99% of this news is already priced in, but the media need to come up with some story, after all they have to report something [[pleading ignorance is not an option: normxxx]] and the masses who are desperate news junkies are always willing and eager to provide an ear for this sewage which is nowadays mistaken for news. Misunderstand us not, for we do believe that there will shortly come a day of reckoning, but that day is not quite upon us, and even when it does fall upon us, it will actually produce some incredible investment opportunities in its aftermath. For as we have always stated in the past every disaster always leads to incredible opportunity; the problem is that most sit there waiting for the hammer to fall on their heads instead of positioning themselves for the impending opportunity that lies just around the corner.
Our moving averages of new lows (all 3 of them) have overtaken the moving averages of new highs; this indicates that the smart money is still selling into strength or at the very least they are not opening up new long positions yet. As we stated last week, the NYSE short interest ratio spiked to yet another new high, which suggests that at this point we should only expect a correction and not a crash.
Increasingly, in the last several weeks, the volume on the down days has been higher than the volume on the up days and so it looks like this correction could come upon us suddenly— but it will only be a correction and not a crash— at least not yet. Two weeks ago the volume surged quite a bit on the down days, there were days when the volume was close to approaching the 4 billion mark; this is something that never occurred in the last few weeks on days when the market closed up. This rapid rise in volume on down days means that there is now a 50% chance that the market could test its lows again. The main area now would be the 13350 - 13400 range; if these levels are taken out on a closing basis on high volume, then we can at the very least expect a test of the 13000 mark if not the 12500 price point level.
If we look at the sentiment indicators produced by the polling/'sampling' services, we note that during this entire run up the bears have outnumbered the bulls. When you combine the neutral camp with the bear camp the number is even higher (remember there are no such things as neutral individuals— these chaps are just bears who have temporarily lost either their teeth or claws or both).
What we are dealing with here is perception and, even though many of these sample individuals probably have small to no positions in the markets (these are not scientific polls or samples), it is very useful data. Most of these chaps are small investors who missed the entire bull as they were either sitting on the sidelines after being stung with massive loses when the Nasdaq tanked back in 2000 or they were busy playing the real estate market and collectively these chaps are sitting on what amounts to almost 2 trillion dollars; all this money is sitting in money market accounts waiting to be deployed. They are now oscillating between fear and greed, as on one level they think it’s too late to jump in and on the other they hate the profits they have missed, and fear that if they keep waiting they could lose even more. Eventually they will jump in feet first and help drive the markets to new highs and then they will be roasted alive and flung out head first as they overstay their welcome. This is exactly what took place and continues to take place in the housing sector.
Any major pull back should be viewed as a buying opportunity and we feel that a pull back of 600-900 points could still be in the works.
We are expecting the pull back in the short term time frame. This might or might not materialize, as short term timing is the most unpredictable time frame to deal with. If it does transpire, risk takers and futures players may buy calls on the Dow, QQQQ.s, OEX and SPX indices; futures players can go long Dow or SP500 futures contracts. Wait for at least a 600 point pull back from the current level.
Based on the above two excerpts, risk takers should have gone long around 13400. (Three weeks ago we stated one should wait for a pull back in the 600-900 point range— at that time the Dow was trading at around 14150-14200 which would roughly equate to a pull back to the 13250 to 13550 range.) However in the Oct 9th issue we did state that we would advise risk takers when to go long and we did so in the next update. Here we state that players should wait for a pull back of at least 600 points from Wednesday's close. Since the Dow closed on the 16th at 13992 and then traded the next day as high as 14012 before pulling back then, if you subtract 600 points, you get roughly 13412 and the markets traded as low as 13407 on the 22nd of this month. Risk takers should now be long with stops at 13350. Risk takers should understand that one cannot win all the time, but when one does win, the spoils are usually great as was the case with our last rapid win of over 200% in a few short days. Traders should have closed these last long positions out on penetrating the 13700-13800 range, as we feel that one more pull back could be in the works [[and may well have started: normxxx]].
Conclusion
It’s possible that the Dow could test its lows but it would have to break below the 13350 ranges to trigger that possibility. Right now there is only a 50% or less chance of this becoming reality. If the markets were to pull back and test their lows it would just present another wonderful buying opportunity.
All others should use any and all pull backs to open up new positions or add to their positions from the plays listed in our various portfolios.
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Normxxx
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The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.
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