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Oil Bull In the China Shop - Are You Listening?

Opening Whisper

It has been a light economic week on Wall Street which should have been good for our short-term bullish position. However, the oil bull crashed the party and precipitated a sell-off in equities late in the week. With oil prices near the $60 mark, who can be bullish on transports, manufacturing and consumer spending? How slippery is this oil slope? I'm not sure, but it seems to me that seasonal influences would have caused oil to peak earlier than this. Something else must be at work. Perhaps the more far-reaching influences of supply and demand are starting to creep into the supply chain. A quick look at the crude oil chart (symbol: $WTIC) seems to have us right in the midst of a bullish wave 3. If that is the case then $70 or $75 may be a possibility over the next few months. Whether that will be a reality or not doesn't matter to these markets. The markets base their moves on perception until the reality develops.

Thursday's market sell-off was on a heavy 2 billion shares on the NYSE. Friday's action perpetuated the decline and resulted in even heavier trading which included a rebalancing of the Russell indexes.

China - China - China. This week's story was about oil and the U.S. Senate's ranting and raving over China's "protectionism". I'll reserve my judgment for later, but Chinese demand for commodities will continue to be a long term nexus for the U.S. and global energy economy. Next week's economic calendar is heavy and includes an FOMC meeting. The wide range of economic inputs should give us a good indication of whether we are moving lower in a hurry or can form a less oily footing from which to launch a summer rally.

Our Trading System - What The Numbers Are Telling Us

Our system model has lost last week's flat momentum and all indicators gave up and turned down on the week. Even though our MACD is still positive, our faster histogram is now fading and we must go to cash since our faster indicators have signaled that cash and caution are necessary. Our system works because we go to cash and get neutral quickly when the market is making its trend decisions and we only take a bite out of the fat part of the market trends when we get full-fledged signals to buy or sell. But our system works best when our MACD gets well away from the zero line and finds a top or a bottom extreme from which to reverse. A trend reversal like we saw this week, which comes when our MACD has recently crossed the zero line, causes us some technical analysis confusion. This makes a case for a market which cycling faster than that cycle length which our model is assuming.

If we were to let our fast signals "out-vote" the MACD then we could say that we have a "sell" signal. However, if you are familiar with our methods, then you know that we try to spend a week in cash between trend changes to let the market transition to its new trend or resume its prior trend. Because some sentiment indicators have not been wildly extreme, then we suspect that the downward move on the week may not be signaling a change in trend but only a pause until we resume the rally that started in late April and which may carry us into mid-summer. This is certainly not a time to make heavy bets one way or another.

NDX - 6 month Chart Model - Friday June 24, 2005

What Is The Current Sentiment?

The NDX/SPX ratio is has not corrected its relative downturn. Even big oil prices have not given technology any relative strength. A continuation of this pattern could be very bearish.

3 year Weekly Semiconductor / NDX Relative Strength Ratio

The 8 day moving average of the CBOE Put/Call Ratio (symbol $CPC) has started moving higher (increasing fear) but still seems to be in neutral territory and never did get to any kind of extreme low to give us a sell indication. (Chart not shown)

The Nasdaq Summation index ($NASI) chart is still bullish but is just now showing signs of topping. Note that the MACD has rolled over.

I am including the next chart again this week. This is a look at the relative strength between the Broker Dealer Index ($XBD) and the Nasdaq 100 ($NDX). This ratio has spiked higher this week. We see that in mid-May of this year there was a small downward spike in the ratio which has since recovered sharply. Is this a buy signal? Similar signals may have been given in March 2003 and early July 2004. What are we to make of this? Could we yet have a summer rally that might surprise the bears?

3 Year Weekly $XBD / $NDX Relative Strength

Sentiment seems to be moving again towards fear, but the move is not yet dramatic enough to give us a sell signal. The VIX has poked its head above a bottom but has not yet gotten to bearish signal levels. Should the VIX spike above the 50 day moving average, currently at 14, then we would have some bearish bias. As it is, nobody seems to be getting too nervous just yet. Hang on to your hats next week. What if the FOMC signals that it is finished raising the Fed funds rate? The markets might rally sharply. One indication that they might do that is the significant increase in the M3 that we have seen in the last two weeks. What do they fear? What are they buying? Do they need a summer rally?

2 year - Weekly VIX Volatility Index

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

Our weekly MACD buy signal has faded but is not dead. We are in a no-man's land between buy and sell signals and must be patient and let the next trend develop. Cash is safe. The next big move is coming, but the direction is unclear. We shouldn't jump too early as we may get whipsawed should the market reverse again and be caught in a short-cycling mode. Watch the VIX and CBOE Put/Call ratio for increasing fear. Watch the FOMC next Thursday. Remember also that we are at the end of the quarter and at mid-year. Will the markets be groomed?

Market Listener Trend Timing Summary
Current Signal: 100% CASH (Bought RYMXX Gov't Money Market) Subscribers were advised by email to go to cash before the close on Friday.

Stay in cash until we have a confirmed sell signal or until we see a buy reversal.

An email will be sent to subscribers if there is a mid-week update.

The Market is whispering...a trend change is coming. Are you listening?

The Market Listener Indicators
(YTD Gain/Loss with RYVYX & RYVNX = +17.13% as of June 24 Close)

Week Ending  Slo. Stoch.   StochRSI   ROC   MACD   ML Signal1 
June 24, 2005 Sell Sell Sell Buy- Cash
June 17, 2005 Buy Buy Buy Buy Buy
June 10, 2005 Buy Sell Buy Buy Buy
June 03, 2005 Buy Buy Buy Buy Buy
May 27, 2005 Buy Buy Buy Sell++ Buy
May 20, 2005 Buy Buy Buy Sell++ Buy
May 13, 2005 Buy Buy Buy Sell++ Buy
May 06, 2005 Buy Buy Buy Sell+ CASH
Apr 29, 2005 Sell Sell Sell Sell Sell
Apr 22, 2005 Sell Sell Sell Sell Sell
Apr 15, 2005 Sell Sell Sell Sell Sell
Apr 08, 2005 Sell Sell+ Sell Sell Sell
Apr 01, 2005 Sell Sell Sell Sell Sell
Mar 24, 2005 Sell Sell Sell Sell Sell
Mar 18, 2005 Sell Sell Sell Sell Sell
Mar 11, 2005 Sell Sell Sell Sell Sell
Mar 04, 2005 Sell Sell Sell+ Sell Sell
Feb 25, 2005 Sell Sell Sell Sell Sell
Feb 18, 2005 Sell Sell Sell Sell Sell
Feb 11, 2005 Sell Sell Sell Sell Sell
Feb 04, 2005 Sell Cash Sell Sell Cash
Jan 28, 2005 Sell Sell Sell Sell Sell
Jan 21, 2005 Sell Sell Sell Buy- Sell
Jan 14, 2005 Sell Sell Sell Buy Sell
Jan 07, 2005 Buy Sell Sell Buy Sell
Dec 31, 2004 Buy Buy Sell Buy Cash
Dec 23, 2004 Buy Buy Buy- Buy Buy
Dec 17, 2004 Buy Buy Buy Buy Buy
Dec 10, 2004 Buy Buy Buy Buy Buy
Dec 03, 2004 Buy Buy Buy Buy Buy
Nov 26, 2004 Buy Buy Buy- Buy Buy
Nov 19, 2004 Buy Buy Buy Buy Buy
Nov 12, 2004 Buy Buy Buy Buy Buy
Nov 05, 2004 Buy Buy Buy Buy Buy
Oct 29, 2004 Buy Buy Buy Buy Buy
1 This Market Listener signal is our base signal. The MACD is our primary weekly input, but can be "out-voted" by the other faster indicators on a daily basis when we need to go to cash to implement our Cash Safety Stop (CSS). You should not base your trading on this or any other single indicator. With Rydex Dynamic funds, we can trade in the morning and 5 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 SYSTEM MODEL SIGNALS.

Listen To What He Says

KJV Luke 21:25-28 "And there shall be signs in the sun, and in the moon, and in the stars; and upon the earth distress of nations, with perplexity; the sea and the waves roaring; Men's hearts failing them for fear, and for looking after those things which are coming on the earth: for the powers of heaven shall be shaken. And then shall they see the Son of man coming in a cloud with power and great glory. And when these things begin to come to pass, then look up, and lift up your heads; for your redemption draweth nigh."

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

Wishing you all the profit you can handle,

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