Opening Whisper

I'm not even sure what an "iPod" is?! OK, I do know what it does ("5000-hit Wonder"), but I personally do not own one. And those big screen TV's, high definition TV? DVD players/recorders, TiVo, digital cameras, video games? I just don't get it. That's all we see in the electronic retailers' advertisements. Why? Because they sell!!! But what productivity enhancements do these items add to our economy or our culture? Are we dumbing down the whole electronics and software sectors? Are these electronic "doo-dads" and games selling in the rest of the world or are we Americans the only nation rationalizing these purchases because we can just put them on our credit cards?

You heard it here first - the next Electronics Bubble is upon us! Those personal computers are now indispensable. The printers, the external hard drives, the CD & DVD burners all provide us with some level of increased productivity and ability to communicate and share information. Those early days of personal electronics were different as software, computer hardware and cell phones enhanced our ability to do business and make us all much more efficient. Even today, we have so much further to go in terms of real productivity, in real businesses, using real hardware and effective smart software. But productivity has gotten lost in the consumerism of America, and every new gizmo that makes our lives so much "richer", or maybe I should say poorer or at least deeper in debt.

Where would Apple stock be priced were it not for its iPod? And what about all of the other companies that are feasting on the consumer electronics boom. I wonder what sales of these items would be like if there were a substantial decline in the economy? Lost jobs, higher oil prices, potential stagflation might hit the electronics retailers and manufacturers harder than those companies who sell life's necessities. Life is good, for now.

Here is the Apple chart for the last 3 years. At the bubble peak, AAPL was ONLY 35!

Apple Computer, Inc. - 3 years

Our Trading System - What The Numbers Are Telling Us

The Put/Call spike of March 18 prompted us to look for a short-term rally in the markets. This week's rally is a result of that Put/Call peak and the resulting optimism which has been developing for the new earnings season which started yesterday. The NDX was up 1.11% for the week. The other indices were up by basically the same amount on the week indicating that the only buying is on the baskets of stocks. There is little buying enthusiasm for any particular sector. Volume on the NYSE has been shrinking each day this week. This is a divergent and bearish sign.

Our current sell signal strength is languishing. The Stochastic, StochRSI and ROC have moved "toward" a Buy signal buy are not there yet, but may be telling us to keep our profits and go to cash. Because of the daily rallies this week we did not add to our short position and at this point I have approximately 50% of my trading funds in the short (holding RYVNX) position.

On the daily NDX chart the short term MACD's have turned positive. Our weekly MACD is showing a histogram that has bottomed or moved ever so slightly in a more positive direction. Has our MACD signaled a move toward a new buy signal? We cannot be sure yet, but it seems prudent to let our faster indicators keep us in a partial cash, but short position.

Unless this earnings seasons gets some kind of unknown kick in the pants, we suspect that we are headed for the NDX August 2004 lows of 1300. But before we get there, we may see a pause in the decline as the Dow Industrials approach the 4-digit 9,999 level. In the interim, will the market continue its rally into next week?

I am going to use NDX level of 1503, our high for the week as our new resistance level. A closing price on the Nasdaq 100 above 1503 will trigger our "cash" signal.

NDX - 2 yr. Chart Model - Friday April 8, 2005

What Is The Current Sentiment?

The markets again finished the week on a weak note. The VIX has fallen very fast this week indicating that complacency is the order of the day. Friday we saw a bounce off of sub-12 levels. From a contrarian viewpoint, this seems to indicate that we might be building toward another step decline in the market levels.

VIX Volatility Index - 6 months

Let's take a look this week at the Small Cap (Russell 2000) sentiment ratio chart -

$RUT/$SPX. (The relative strength between small cap sector and S&P 500)

$RUT / $SPX Sentiment Ratio - 1 year

This ratio is accelerating downward and seems to indicate that the long-favored small cap stocks are quickly losing that favor. This ratio is now back down to a level not seen since the crushing it took in the first week in January 2005. This is a bearish signal for the entire market.

The Dow Transports lost ground dramatically today (symbol $TRAN). I am hesitating to use the work "crashed", but the acceleration downward today alone was very dramatic following the earnings warning announcement from USF Corp today. Here is a relative strength chart of the Dow Transport vs. Industrials.

Dow Transports / Industrials Sentiment Ratio - 6 months

Educational Example - The Bond Market: I won't show them here, but just do your own homework and take a look at the 50 and 200 weekly EMA on the bond rate (symbol $TYX in StockCharts.com). Then take a look at the 50 and 200 daily EMA on $TYX. In both charts, the 50 has either crossed above (daily) or is near to crossing above (weekly) the 200 EMA. Question: Where are bond yields heading?

Where Do We Go From Here and How To Listen For the Next Signal?

Market Listener Summary for the Week

Current Signal: Sell

Money Management: 50% Cash

Next Signal?: Go to cash on a daily close of NDX above 1503

Keep watching our indicators (particularly the Stochastic - "Slow STO" line rising above 20) and the NDX pushing up against its 1503 resistance level. Let's be ready to move to a cash neutral position if any significant rally develops next week. Other than that, we should stick with our SELL signal. Aggressive investors can add to short positions on weak rallies next week. Conservative investors should hold to a partial cash - partial short position.

The Market is whispering now, but may be getting ready to shout!

Are you listening?

The Market Listener Indicators

¹ This Market Listener signal is our base signal. Daily Money Management signals may move us partially and/or temporarily to cash. You should not base your trading on this or any other single indicator or set of indicators. With Rydex I can trade 10 minutes prior to the close during the trading week when I see that one or more of the fast signal indicators have changed signals. This is particularly important if I am going to a CASH position in order to preserve capital. The above table shows the results of the end-of-week, WEEKLY SIGNALS

Listen To What He Says

From Micah 6:7,8 (KJV):

"Will the LORD be pleased with thousands of rams, or with ten thousands of rivers of oil? shall I give my firstborn for my transgression, the fruit of my body for the sin of my soul?

He hath shewed thee, O man, what is good; and what doth the LORD require of thee, but to do justly, and to love mercy, and to walk humbly with thy God?"

I am still working on the Art of Listening, and hope that you are also!