Opening Whisper - Wow, what a week! These are strange days for the markets. Rumors abound. And the facts aren't much better. Does it seem to you, like it does to me, that there is a lot of negativity flowing into the Wall Street soup?

So it's with a lot of trepidation that we had to move on our BUY signal on Friday. The NDX is holding up well on the Dell stability and perhaps other good news behind the scenes. Is money now flowing from the dividend paying stocks back into the Nasdaq techs? It sure looks like it is at this time.

Our Trading System - What The Numbers Are Telling Us

Our system model gave a BUY signal this week. All three (3) of our fast indicators have given buy signals. The weekly MACD sell signal has begun to weaken. The weekly 12-26-12 MACD histogram (on the bottom of the chart) has moved more positive 3 weeks in a row.

NDX - 6 month Chart Model - Friday May 13, 2005

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The Dow Industrials, SPX and OEX are all lagging behind the NDX & COMP. The following is a chart of the NDX strength relative to the SPX. We are seeing a turn in tech optimism not seen since last August. Will it last? Only time will tell, but the sentiment is very negative these days. The news is bad all around. This NDX/SPX ratio (chart below) is usually a leading indicator that we are in for a rally of some magnitude.

3 Year NDX / SPX Relative Strength - Weekly

What Is The Current Sentiment?

In the past three weeks we have seen some sentiment indicators turn as bearish as we have seen since August 2004 and October 2002. This usually means that a rally is at hand.

Let's take a look and see just how negative the sentiment is at this time. Has it turned?

3 Year Weekly Bullish Percent NDX Chart - $BPNDX

The Bullish Percent on the NDX has not yet crossed above the 8 week moving average, but the MACD histogram has started an upward move. The short-term negativity may have abated on the NDX and seems to have turned more bullish in the last 3 weeks.

Closer Look - If you take a real close look at this 3 year chart, you will notice how the BPNDX seems to be a leading indicator of major turns in the markets. Almost without fail, a low in this ratio leads the rallies by a week or two. Can this ratio drop some more from where we are today? Yes, it can change direction and become more negative. But it seems to have put it a short-term bottom and the turn in this indicator matches our fast indicators in announcing a potential buy signal.

VIX Volatility Index - 12 months

The VIX has turned up again this week indicating that fear in the market is increasing. When do rallies occur in a bear market? They start when fear is greatest. Has the MACD on the above chart topped out? We will find out next week. It is difficult yielding to a buy signal when fear is increasing for the week. If you are a very conservative investor, you might want to apply the buy signal to only a fraction of your trading account until we get more clarity on the VIX. A falling VIX from this point would confirm our buy signal.

But remember the VIX is calculated using options of the S&P 500 and the S&P 100, not the Nasdaq stock options.

But take a look at the VXN chart below. This volatility measure is based on the NDX 100 options. It has turned up also, but looks much more benign that the VIX. The reason is that the NDX has more relative strength than the SPX.

1 Year VXN Volatility (of NDX 100) - Weekly

To show you that in fact, the VXN is much tamer than the VIX, take a look at the following chart which shows the ratio of the two.

1 Year Ratio of VXN to VIX - Weekly

This chart shows us that the VXN (NDX volatility) fear is decreasing relative to the VIX (S&P 500 volatility). This is a very low reading. What's up with this?

3 Year Weekly Nasdaq Summation Index

The Nasdaq Summation Index (chart above) has reached very oversold levels and its stochastic has been lurking at low levels not seen since June - September 2002. This week the NSI has continued its upward move. The stochastic may be turning and the MACD has turned up. This may be another indication that we are ready for a sustained rally led by the Nasdaq technology issues. It also confirms our model.

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

One can never know where the market is going. We can only read the signs and let the charts tell us where the short, intermediate and long-term trends are at any point in time. The Nasdaq short-term seems to be calling for a move higher over the next few weeks. It is quite possible however that we are seeing the "smart money" of the big cap stocks getting out while the Nasdaq day traders are still trying to milk a little momentum for all that it is worth. If this is true then we could be in for a false buy signal. But our trend following system will not allow us to do any guessing about such possibilities. If our buy signal turns out to be correct in the face of so much negativity, then we will look like geniuses for going against the trend.

The whole thing could crash next week and we may be caught with a buy signal at the time, but we have no choice if we are going to blindly follow our "system" without emotion.

If you don't like the buy signal here and are very negative on this market in the long term, then just stay in cash until we get the next sell signal.

Next week is options expiration week and could prove to be even more dramatic than last week. We also get some economic numbers - PPI, CPI, Industrial Production, NY State & Philadelphia Fed manufacturing indexes.

Summer slump or summer jump? That is the question. We'll talk about it again next weekend.

The Market is changing directions now! Are you listening?

The Market Listener Indicators (Sell++ = sell signal turning toward Buy)

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 day/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

RSV 1 Corinthians 13:1-7 "If I speak in the tongues of men and of angels, but have not love, I am a noisy gong or a clanging cymbal. And if I have prophetic powers, and understand all mysteries and all knowledge, and if I have all faith, so as to remove mountains, but have not love, I am nothing. If I give away all I have, and if I deliver my body to be burned, but have not love, I gain nothing. Love is patient and kind; love is not jealous or boastful; it is not arrogant or rude. Love does not insist on its own way; it is not irritable or resentful; it does not rejoice at wrong, but rejoices in the right.

Love bears all things, believes all things, hopes all things, endures all things."

I am working on the art of listening and hope that you are too.