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Dam That Levee - Are You Listening?

Opening Whisper

"The race of mankind would perish did they cease to aid each other. We cannot exist without mutual help. All therefore that need aid have a right to ask it from their fellow-men; and no one who has the power of granting can refuse it without guilt."
- Sir Walter Scott (Scottish Novelist, Poet, Historian and Biographer, 1771-1832

The devastation that was Katrina is beyond my wild imagination. Where would I be were it not for God's grace and should I find myself without home or car or business or worse? Most of us are neither islands nor hermits. The Southeast Asian tsunami was there,... far away. This one is at my back door. This was an historic week. Hopefully it will change me for the better. Hopefully you will do your part. Our thoughts and prayers are with those families in crisis and disaster mode.

The equity markets attempted to put a contrarian happy face on everything this week. This attitude seems to be summarized like this; "The US economy can only get better from here, right? We've had hurricanes before and some big ones which devastated Florida last year. Hurricane recovery and rebuilding must be good for GDP and the local economies. Right? And the economy might be slowing, so the FOMC must stop raising short rates. Right?" And the spinning and weaving continue in an attempt to form a levee of denial. The design of that "bull-work" is intended to draw the buy-'n-hope crowd into hanging on to their stocks and perhaps buying even more.

Equities rallied on the trading week in the face of a lot of bad news. The equity indexes were up one-half to one percent on the week and volume was on the increase, but the junior traders were at the bull-dozer controls patching, repairing and backfilling where they could. In the next two weeks, the senior traders will be back in their chairs and a more experienced thought process may take charge of equity and bond portfolios.

And if the man-made levee fails in the near future and the selling starts in earnest, nothing will be able to hold back the torrents. The vital lesson of the week is this; Make sure that you get out of the city before the levee breaks!

TECHNICALS: Exactly on queue and as we discussed in our report last week, the NDX found support at 1550 and the SPX at 1200. The bounce was inevitable, but maybe short-lived. Time will tell us. The Retail Index ($RLX) gave up another 1.2% this week. GE lost another fraction of a percent. General Motors (GM) and Boeing (BA) were down approximately 3%.

Let's continue to remember that we are coming up on the 9/11 anniversary. And hurricane season is still with us.

TREND FOLLOWING COMPLIANCE: We don't care, or predict whether the FOMC stops raising short term rates or whether interest rates rise from here. Our Market Listener focus is strictly on identifying price trends, deviations from that trend and turns. Our focus for 2005 has been short term trends of 3-4 months. We attempt to identify trend turns and deviations using technical indicators which give us systematic, mathematical, and repeatable forms of input with which to make our decisions. In order to keep emotion out of our trend timing methods, we must employ those mathematical and statistical tools unswervingly. As you are aware, we use MACD, stochastics, volume and other tools to remove noise from the price data and permit us to know what price is doing. The following chart gives us an overview of where our trend turns have occurred in 2005. Our timing methods have worked well for us this year.

12 Month Chart, Daily Prices - NDX ZigZag

Our Fault Tolerant Cash Safety Stop is calculated based on the recent historical average true range of the price. The trick with stops is to keep them close for safety, but also keep them far enough away to prevent premature exits to cash or signal reversals. The following chart gives us a good idea where we are in our current trend and the location of the stop/exit line. Notice that this trend which started on August 4, has not had any severe capitulation selling. This sell-down has been very steady-as-she-goes. We may need some true fear-based selling before this down trend is over. And remember, the two prior trends were 4 and 3 months respectively. This one is only 30 days along and therefore may have some downside to go yet if it is more than just a downward retracement of a longer term up-trend.

The down trend since August 4 has been rattled by Katrina, but definitely not detoured or destroyed just yet.

30 Day Chart NDX - Trend Following Channel

RISK ASSESSMENT: The downside market risk (probability of a sell-off) is dominated by geo-politics, oil transport/refining and the very vulnerable consumer. There is very little risk to our sell signal on the upside (low probability of a huge rally). We are still in safe territory with this Sell signal. Remember, we will start to see increasingly larger initial jobless claims in the weeks ahead,... if they are not "seasonally adjusted" away by the economy makers.

Our Trading System - What The Numbers Are Telling Us

Our SELL signal is still in effect. The NDX gave back all of last week's gains. Our chart model indicators on the NDX are still all in "sell" mode. The StochRSI turned up slightly, but we are basically back to where we were 2 weeks ago. Not much has changed with our model.

NDX - Revised 1 Year Chart Model - Friday Sep 2, 2005

What About Bonds? The ten-year note yield fell sharply this week, touching 3.98%, but then bounced back to 4.02% being down 16 basis points on the week. The safety of notes and bonds appeared to be where the real smart money flowed.

What About Gold? - Gold mining stocks ($HUI, $XAU, NEM) were up on the week following the dramatically falling US dollar index. There is a weak upward trend in the miners since an interim low in mid-May. The quality of that trend is not good and has too much volatility for short term traders.

We got stopped out of NEM at 39.40 in a trend knock-out (TKO) last week and NEM has since recovered 4% this week to 40.71. Average volume on NEM is below the 60 day EMA and therefore there is no quantifiable strength to give us a trend signal. The rising prices on the gold miners in the last few days could just be a sucker rally. Wait for some volume and a rise in 10 year treasury yields to confirm a true bullish trend.

What Is The Current Market Sentiment?

Current sentiment is non-descript. The VIX and the CBOE Total Put/Call ratio were relatively flat to down for the week. The levels of rising fear measured by the 8-10 day EMA's have not abated very much. The current trend is consistent with our sell signal and is not yet at levels which could ignite a self-sustaining rally. The key to the markets next week is PRICE. Forget sentiment because we are at mid-range and an inflection point is due in the price action.

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

The daily charts have bounced off of the oversold condition. Since the stochastic is now off of the bottom, there might be a little less impetus for a rally since there is no oversold case for it.

Our Fault Tolerant Cash Safety Stop (FTCSS) was set last week at 1606 on the NDX. Due to the aging of our sell signal and our average range calculations, we need to set our stop exit at 1590 which was our Sell entry point. Holding at this level will prevent a large loss at this break even point.

Keep your eyes on that 1590 level and exit to cash on a daily close above 1590. This weekend, the newscasts will be filled with images of disaster from the gulf coast. The important information will be that regarding the status of electrical power supplies in the affected areas. Without electrical power, industry and commerce will be dead in the water.

Market Listener Trend Timing Signal Summary

Current Signal: 100% SELL (Bought RYVNX Rydex Venture 100 Fund)
Subscribers were advised by email of the SELL signal before the close on Monday Aug. 8.

Fault Tolerant Cash Safety Stop - For the Week of September 6, admit failure and exit to cash (RYMXX) on a daily close of NDX above 1590 which is our breakeven point for this sell signal.

We will issue an email to subscribers next week if we get an exit signal or have a mid-week update necessary to adjust the FTCSS level.


The Market is at an inflection point. Are you listening?

The Market Listener Indicators

(YTD Gain/Loss with RYVYX & RYVNX approx. +31.5 % as of Sep. 2 Close)

Week Ending Slo. Stoch.
ML Signal 1
Sep 02, 2005 Sell Sell Sell Sell Sell
Aug 26, 2005 Sell Sell Sell Sell Sell
Aug 19, 2005 Sell Sell Buy Sell Sell
Aug 12, 2005 Buy- Buy Neutral Sell Sell
Apr 08, 2005
Buy- Buy Buy Buy Sell
Aug 04, 2005 Buy Buy Buy Buy Cash
July 29, 2005 Buy Buy Buy Buy Buy
July 22, 2005 Buy Buy Buy Buy Buy
July 15, 2005 Buy Buy Sell Buy Buy
July 08, 2005 Sell Buy Buy Buy Buy
July 01, 2005 Sell Sell Sell Buy- Cash
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
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 Fault Tolerant Cash Safety Stop (FTCSS). 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

NAB Luke 11:5-13 Then He said to them, "Suppose one of you has a friend, and goes to him at midnight and says to him, 'Friend, lend me three loaves; for a friend of mine has come to me from a journey, and I have nothing to set before him'; and from inside he answers and says, 'Do not bother me; the door has already been shut and my children and I are in bed; I cannot get up and give you anything.' I tell you, even though he will not get up and give him anything because he is his friend, yet because of his persistence he will get up and give him as much as he needs. So I say to you, ask, and it will be given to you; seek, and you will find; knock, and it will be opened to you. For everyone who asks, receives; and he who seeks, finds; and to him who knocks, it will be opened. Now suppose one of you fathers is asked by his son for a fish; he will not give him a snake instead of a fish, will he? Or if he is asked for an egg, he will not give him a scorpion, will he? If you then, being evil, know how to give good gifts to your children, how much more will your heavenly Father give the Holy Spirit to those who ask Him?"

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

Best Profits,

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