DJI History: Profiting from the Past Market Trends

The time for change is today, for tomorrow never comes; change now or remain woven in yesterday’s cocoon forever. Sol Palha

Originally published Feb 28, 2008

Bleak Economic Indicators Shake New York

In New York, the economic outlook took a grim turn as a series of troubling indicators emerged. Consumer confidence hit a new low, wholesale inflation spiked, foreclosures surged, home prices experienced a sharp decline, and a forecast predicted significant healthcare cost increases.

According to a report released on Tuesday by the New York-based Conference Board, the Consumer Confidence Index plummeted in February to 75.0 from a revised January figure of 87.3. This reading, the lowest since February 2003 when the index registered 64.8, fell well below analysts’ expectations of 83.0. Wholesale inflation experienced a steep rise in January, driven by increasing food, energy, and medical costs. This monthly increase pushed the annual inflation rate to its highest level in a quarter-century.

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Continued Decline in House Prices: Experts Predict a Prolonged Fall

The housing market continues to face significant challenges as home prices show no signs of stabilizing. Across the nation, even homes with solid mortgages are experiencing drops in value, leading to a surge in bank repossessions. Experts suggest it may take another year for the market to hit its lowest point, but only after reducing excess inventory and improving credit markets. In light of the sluggish progress, additional government intervention may be necessary if the free market system fails to act swiftly.

According to the Standard & Poor’s/Case-Shiller home price index released on Tuesday, U.S. home prices declined by 8.9 per cent in the final quarter of 2007 compared to the previous year. This marked the most substantial drop in the index’s 20-year history, highlighting the severity of the situation.

Inflation Accelerates Amid Economic Slowdown

The United States faces an unsettling economic situation not witnessed in thirty years—a toxic combination of surging prices and a weakening economy. Economists refer to this phenomenon as “stagflation,” and there are growing concerns that it may be making a comeback. The effects are already being felt as wages fail to keep up with rising costs, job opportunities become scarcer, and a potentially vicious cycle threatens to exacerbate the situation further. The economy experienced a near stall in the final quarter of the previous year and is currently estimated to be growing at a sluggish pace or even contracting—a clear indication of stagnation. Ordinarily, such a slowdown would help curb inflation, but prices continue to rise.

Adding to the concerns, a recent government report revealed that wholesale prices surged by 7.4 per cent over the past year—the most significant annual increase since 1981. The implications of this worrisome data are not lost as policymakers grapple with the challenges ahead. “We’re in a slowdown,” remarked Press Secretary Dana Perino at the White House, where economic discussions had remained optimistic until recently.

DJI History: Market Surprises Amidst Stagflation Concerns

Now, most of these news stories made headlines today (Tuesday), and one would have thought the markets would have crashed or, at the very least, closed down 100-150 points. Instead, all it took was a headline stating that IBM would buy back up to 15 billion dollars worth of its shares to turn the market around. When a market climbs a wall of worry, it bodes well for the intermediate and longer-term pictures. This is what we call a psychological solid development. While the overall volume has been dropping in the last few trading days, the markets closed up on higher volume today, which is always a positive.

Stagflation is typically a terrible word and usually negative regarding market action. However, we are not in standard times. Half the world lives on less than a dollar a day, and they desperately want to climb out of this hole. For them, it’s not a matter of trying to get the better things in life; it’s just a matter of trying to get the fundamental things in life. They want to eat a decently balanced meal every day, have clean water and have a safe and decent place to live in.

Climbing the Wall of Worry: DJI History and a Positive Market Shift

Most Westerners cannot imagine living like this or that such a considerable per cent of the world’s population lives in conditions that make any Jail in the US almost seem like a luxury palace. One has to travel there to look at this situation with their own eyes, and only then can one understand the full reason behind the soaring commodity markets and why this trend will not end anytime soon.

One can dream about or plan on owning a high-end luxury car, but this is not a necessity; the same thing goes for planning a dream vacation. But how many of us dream of merely owning a simple car or having a piece of steak or chicken for dinner or a cup of coffee with a slice of cheesecake or a cup of tea with scones or crumpets? The answer would be almost none or 0, but this is not the case in many developing nations.

Rising Demand and Changing Lives in Commodity Markets

Commodity prices were down for years because these individuals were denied everything you and I take for granted. Costs were kept low because they could not afford the fundamental things in life. As the economies in Asia and other impoverished nations continue to improve and hundreds of thousands of individuals jump from poverty to the middle-class level every few weeks, the demand for these essential items will continue to soar.

Imagine this; most of these individuals have never driven a car, they have never had the luxury to consume meat regularly, no proper sanitation, no coffee, no pastries and cakes, and the list goes on. So when their incomes start to rise, the first thing that probably comes to mind after moving to a better place is the thought of buying a new car; now that TATA Motors have come out with a 2500-dollar car, this dream is a reality for millions of individuals.

Then, of course, they also want to be able to eat more meat, drink coffee, eat pastries, etc. Thus the demand for wheat, cocoa, coffee, sugar, oil, copper, meat, milk, butter etc. all starts to soar. It is safe to assume that unless the US economy entirely comes to a standstill (highly unlikely), demand for these products will not ease for a long time.

Navigating the Volatility of the Markets and the Power of Selective Investing

For this reason, we stated that the next leg up would be selective in that not all sectors will rise. Commodity-based stocks are going to be the ones that will increase the most, and for this reason, we have positioned ourselves in segments of this sector we think are most likely to benefit from this increased demand; specific sectors are going to experience even higher gains as they have been held back and are now in the process of playing catch up.

Do not for one moment think the ride up will be smooth and easy; if it were, every jackass would be a multi-millionaire. It takes patience and discipline to make money. Look at how patience and discipline have rewarded all the early Palladium bullion traders; initially, bullion did nothing, then it exploded upwards only to mount a brutal correction. Palladium soared from 180 (Feb 2004) to over 390 before pulling back. Weak hands would have bailed out, but now this position is up almost 200%, and the second position of 330 (April 07) is up another 66.6%. We feel that the Journey on Palladium has only just begun.

One also has to remember that one cannot win on all the stocks one has positions in because that’s just how the markets operate, bullion could trade higher, but some rat in the company starts to play with the books or mismanages the business and the stock plunges. It’s for this reason we have spread ourselves and invested in several different companies.

DJI History: Assessing Transports and Dow’s Potential Surge

The Dow transports continue to behave healthily; they appear locked in a range between 4590-4860. Two things need to transpire now; first, they need to break past 4860 for nine days, but the more critical hurdle is 4950. If they can trade above this range for 18-21 days in a row, then there is an excellent chance they could trade up to 5220 before pulling back. If they reach 5220, another new development will occur; the transports will experience a phase shift. The phase will move from down to up. Right now, the phase is downwards. Phase and trend are not the same; the trend can be upward, but the phase is down.

When the phase is down, the power of the move is usually diminished, so the strongest move is achieved when an index or stock is in an uptrend and an upward phase. Once the Transports experience a phase shift, it will only be a matter of time before the Dow plays catch up. When it comes to the Dow, the main hurdle for the Dow is now 12800. We feel that when the transports take out 4950, the Dow should be able to surge past 12800. Once the Dow can trade past 12800 for 21-24 days in a row, it can test the 13250-13450 ranges before pulling back.

The three moving averages of new highs that we maintain all surged past their counterpart moving averages of new lows for the first time in weeks; this illustrates underlying strength in the markets. At least from the inside, the markets are slowly building up strength; keywords being slowly. What makes the current conditions maddening for many is that both the bears and the bulls are confused. In other words, neither knows which direction to bet, so they keep jumping in and out.

Examining Market Sentiment, Contrarian Indicators, and the Role of Smart Money

However, at some point, the masses will start to follow the smart money, which so far does not appear to be shorting the markets aggressively. In the interim, this is the best time to build positions in the early leaders, for these chaps will explode when the market conditions change. Already we have several stocks from our portfolio putting in new 52-week highs.

NYSE’s short interest ratio continues to trade at record levels week after week; to date, no bear market has begun with the short interest ratio in record territory. Also, many so-called top analysts and market technicians have already stated that we are in a bear market; this is an excellent contrarian indicator and bodes well for the markets in the long run.

Another fascinating fact is that the average public investor’s cash position has increased significantly in the past few months. This sort of action signifies fear and uncertainty; both are perfect ingredients for the markets as markets usually climb walls of worries and fall down a cliff of joy.

As we stated last week and the week before last, one negative that we have in this market is that there is too much bullishness in the OEX options arena, and we would like to see some fear sink into these traders. Also, the odd loters (individuals selling or buying shares in odd lots) are still not shorting the markets aggressively as we would like them to. THE MARKETS WILL CONTINUE THEIR RANGE-BOUND ACTION until OEX option traders or odd loters turn highly bearish. The only thing that could bypass all this would be a buy signal from our smart money indicator.

Conclusion

The OEX March 620 call options we are following are now up even more. As we stated before, we are just roughly following these, and the rough entry price we listed last time was in the 10-12 dollar range; the low for this option was 11.80. To be fair, we will increase the entry points to 13-14 dollars. The option is currently trading at 24 dollars. We would go ahead and sell this for a profit. Those that got into Dow or QQQQ options should also close these options.

Just to clarify matters, our primary method of following gains will be via the number of points the Dow has gained since we issued our call to go long, and the second method will be via an OEX option that we monitor from a distance. In Feb 6^th issue, we recommended going long in the 12000-12070 ranges; the Dow traded within this range, and so from a points basis, we are now sitting on roughly 660 points; for futures traders, this translates into 3300 dollars per contract on the mini Dow contracts or 6600 on the regular Dow futures contracts.

Right now, it looks like the markets are slowly building up steam for an upward move; only time will tell how powerful this move will be. However, based on the fact that the markets continue to trade sideways or trend upwards on lousy news days, the high Short interest ratio on the NYSE, the increasing NYSE specialist/Public short interest figures and no sell signals from our indicators all lead us to believe that the potential for a powerful rally is still significant.

To date, we have two buy signals from our smart money indicator on the hourly charts; a buy signal on the daily charts would be one of the most potent bullish confirmations we could get. Continue to add to or purchase stocks listed in our leading portfolio.

New additional Comments March 6^th, 2008

Bernake, the Fed Head, indicated the challenge the feds faced when he commented recently.

“I don’t know how to fix it,” he said during testimony before the Senate banking committee last Thursday. “I don’t know what to do about it.

From a mass psychology perspective, though, this indicates that fear levels are running quite high now that even the Feds are temporarily stumped. As everyone knows, market bottoms usually occur when pessimism levels are sky-high; these levels continue to increase. We feel that in the not-too-distant future central bankers on a worldwide basis will sit down and hammer out some plan, for if not, things could get progressively worse, and this is not in their interests.

Smart Money’s Outlook and Positive Signs in Market Indicators

The smart money seems to be betting that the markets will mount some turnaround in the not-too-distant future as they are not aggressively shorting the markets. The high NYSE short interest ratio is another positive contrarian development; no market has crashed with such a high short interest ratio.

The transports also seem to hold up remarkably well given the record high oil prices. Finally, the trading volume has eased a bit; after hitting the 6 billion and 7 billion shares mark for a day, current trading activity has fallen below the 5 billion mark.

This market now is a trader’s market, and only those positioned in the right sectors will do well; the next leg up will be selective, and not all the stocks will trend higher. Some will trend lower while the markets trend higher.