Opening Whisper

You don't tug on Superman's cape
You don't spit into the wind
You don't pull the mask of the old Lone Ranger
And you don't mess around with Slim
- From the song, "You Don't Mess Around With Jim" by the late Jim Croce

You can hear a clip from Josh Turner's rendition of the Croce song at: http://www.joshturner.com/pages/music.htm

Maybe the summer rally is over and we can give a good tug on the high flying Superman's cape. Maybe the power is gone. Did someone slip him some green, red or gold kryptonite? Only time will tell whether the kryptonite was of the fatal variety,... or just enough to cause some temporary ill effects. Is it time to sell this market?

I think I'll let someone else pull the mask off of the old lone Ranger (or the Phantom of the Opera) and see what kind of reaction they get. Just another way of saying that it may not yet be time to call for another bear market cycle just yet. Our subscribers were advised to go to cash on Thursday before the close based on the increasing volatility. It's best to let other market participants lead the charge next week as we sit in the safety of cash.

The equity markets got a dose of reality on Thursday and Friday with a sell down, but no sell-off. Profit taking was the name of the game and so we chose to participate in profit-keeping by moving to cash on Thursday. The bullish emotional bias seemed to crater on Friday in the face of a pretty good monthly jobs increase (207k) and some prior month upward revisions. Suddenly good news is bad news as the markets interpreted these firmer numbers in conjunction with the rising 10-year note yield to cause worry that rising interest rates could dampen consumer spending. Slower consumer spending and potential mortgage defaults on over-reaching home loans could create the bursting bubble that has been much discussed recently. The Retail indices have gotten hammered this week with the $RLX being down -3.5%.

If you are looking for more bad news, why not look at a GE chart. GE was down 2% on the week and appears to be picking up momentum on the downside. This is not good for the bulls.

The S&P 500 fell back below the former 1230-1235 resistance/support level to 1226. 1235 is once again resistance and it appears that the 4-year highs may not be breached anytime soon without some kind of significant economic or political news. That resistance must be breached quickly or it will become less and less likely. Maybe just a "kiss-goodbye" next week?

Our Trading System - What The Numbers Are Telling Us

Our chart model is still showing Buy signals on the NDX. The NDX would have looked worse this week were it not for the Microsoft rally (MSFT). Using SPX on our chart model would have given a better analysis of the broader markets. Thanks to Mr. Softie we were able to get to cash (Thursday) with a slight gain on the week. Whew!

The drop in major indices this week led to further increases in the VIX and CBOE put/call ratio. Our proprietary adaptive MACD indicators which use the VIX and P/C ratio are very close to Sell signals and were instrumental in causing us to move to cash.

We appear to be solidly in quadrant 3 of this cycle where our weekly MACD histogram will be at a maximum and start to lose momentum over the next 2 weeks even if the market moves sideways to slightly higher. A sell signal appears to be coming, but there is risk in being too early.

NDX - Expanded 6 Month Chart Model - Friday August 5, 2005

What About Bonds? The ten-year note yield seems to be oscillating around the 200 day moving average for the last 2 years. The oscillations are decreasing, but still revert to the mean. Eventually we will see a breakout of the current 4.0 - 4.5% range. Conventional thinking is that we will breakout to the upside (inflationary - rising rates). This week the TNX continued to rally as it appears headed for a 4.6% yield target in the next few weeks.

3 Year Daily 10 Year Note Yield

What About Gold? - Gold mining stocks ($HUI) broke to the upside reversing last week's loss of momentum. However following the opening day of the Newmont Mining pollution trial in Indonesia, the mining stocks sold off. Perhaps this was also somewhat in sympathy with the sell-off in the broader equities markets.

We now have a weak buy signal on the mining stocks based on a daily MACD, but close stops should be employed to limit any losses. Mining stocks might follow other stocks lower again next week. The US dollar index has apparently started another leg down which could help lead gold prices higher. This could be a good time to buy the gold miners particularly because so many are now so gun-shy of this sector. Set your stop loss based on the low of last week for your particular stock or index.

3 Year Daily - Gold Bug's Index $HUI

What Is The Current Market Sentiment?

GE continued to lose ground this week. Citigroup was flat. GE appears to be giving us a leading indication of where equities prices are going. The GE freefall must absolutely pause here and make a dramatic turn if we are going to move the broader indices much higher. If not, the big caps could be in for a bruising. (No Charts)

This week the VIX and CBOE Total Put/Call ratio continued rising from last Friday's fear shock. Put prices are rising and the risk premium for near-term volatility has increased. The VIX is warning that equity pricing is not stable and prices could move dramatically in coming weeks. Our proprietary sentiment indicators have moved dramatically and are within a couple of days of triggering a sell signal unless the VIX fear level subsides quickly. (VIX Chart below)

The Nasdaq New High New Low chart below has turned down for the week busting the extreme upward momentum.

I have also included a chart of the Russell 2000 vs. S&P 500 relative strength ratio. This chart pictures the significant volatility of the small caps which might now be leading the market downturn. $RUT could be a good buy if we find support in the next couple of trading days.

6 Month Daily VIX

2 Year Weekly Nasdaq New Highs/Lows

6 Month - Weekly Russell 2000 / SPX Ratio

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

Last week we acknowledged that we were looking for any reason to go to cash and this week we got it. The SPX thrust failed dramatically at 1245 after making new 4 year highs. The CASH signal was given on Thursday afternoon before the close.

NDX closed the week at 1601. There may an opportunity to go to a sell signal mid-week if our chart model's fast indicators vote together to do so. The MACD is 2-3 weeks from a cross-over to the downside even if we get significant selling next week. We need to be absolutely sure that the trend has turned before we issue the sell signal.

In case it is not clear;
BUY signal means buy Rydex RYVYX (Velocity 100 Fund)
CASH signal means buy Rydex RYMXX (Government Money Market Fund)
SELL signal means buy Rydex RYVNX (Venture 100 Fund)

The Market has had a fender bender. The new signal is CASH, not Crash!

The Market Listener Indicators
(YTD Gain/Loss with RYVYX & RYVNX approx. + 28.8 % as of Aug. 5 Close)

Listen To What He Says

NASB 1 Kings 8:28 "Yet have regard to the prayer of Your servant and to his supplication, O LORD my God, to listen to the cry and to the prayer which Your servant prays before You today; that Your eyes may be open toward this house night and day, toward the place of which You have said, 'My name shall be there,' to listen to the prayer which Your servant shall pray toward this place. Listen to the supplication of Your servant and of Your people Israel, when they pray toward this place; hear in heaven Your dwelling place; hear and forgive."

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

Wishing you all the profit you can handle,