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One-Two Inflation Punch - Are You Listening?

Opening Whisper

And then there was Rita. Just like Katrina, these Gulf Coast hurricanes seem to have a tendency to weaken as they approach the coast. Fortunately for those in their paths, the diminishing energy levels seemed likely to spare the coastal communities and infrastructure from more extreme devastation. But Katrina was a bad body blow. She didn't pull her punch soon enough. And Rita will likely provide a second devastating punch to the head of the energy sector in the southern U.S. The increasing costs of energy will show up in many places other than pump prices in the next few months. Gas up your car early this weekend. But that may only save you a few bucks. There will not be many options for cost savings as we seek to heat our homes this winter and pay higher prices for transportation and manufacturing of nearly everything we purchase.

And this week the FOMC seemed to agree. On Tuesday the Fed participants decided that the risk of inflation was greater than the risk of a slowing economy. Regardless of the "balance" that they typically espouse, they have put their money where there mouth is by raising the short term benchmark rate again this week.

The inflation measure, CPI, has a trend as shown by the chart below. If we were trading the trend on CPI, we would be a buyer here because it is headed higher.

The gravy train will not last forever. The "sweet spot" in the economy is evaporating. The only question is: When will the stock market acknowledge that a slowing is coming, this business cycle is moving into its next phase, and the risk of recession is increasing?


15 Year CPI

TECHNICALS: All major indices bounced off of their recent support levels on Thursday, but all are below their 50 DMA. Of significance is the fact that the Dow Industrials, Dow Transports and S&P 100 are below their 200 DMA's. The Dow Industrials have been range bound between 10,750 and 10,250 (+/- 2.5%) for five months now. Intel and Microsoft look like they are trying to lead the industrials lower in a big hurry!

TREND FOLLOWING COMPLIANCE: The NDX lost 1.73% and the Composite lost 2.01% on the week. This provides us with a nice 3.4% gain on the week by using RYVNX.

The Sell signal compliance was strengthened this week with the declines in technology and the indices. The relative strength of the Nasdaq Composite vs. S&P 500 is shown in the chart below. The Composite is leading stocks lower.


1 Year Nasdaq Composite / SPX Ratio

Our Fault Tolerant Cash Safety Stop is calculated to be 39 points above the NDX close at 1571 which leads to an exit setting of 1610. Our Early Exit line will be at 1590 (which was our Sell Entry Point - Break Even) as seen in the chart below. On a daily close above 1590, reduce your RYVNX position by 50%. On a daily close above 1610, go completely to cash. If we get a sell-off next week, we want to lower our Sell stop setting by letting that setting trail down as the market falls in order to help lock in the profits.

You can adjust that trailing stop setting each day by adding 39 or 40 points to the closing price of the NDX. Do this ONLY when the NDX makes a lower daily close since our Sell signal was instituted on September 15. Trailing stops help lock in profit for the current signal.

Subscribers will receive an email with revised trailing stop levels if the market sells off sharply next week. Subscriptions are free. Send an email to: subscribe@MarketListener.com with "subscribe" in the subject line.


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 consumer confidence. The FOMC announcement to continue to raise short rates increased the probability that the current down trend will continue and that our signal may become more profitable. Much of the hurricane Rita destruction will be known by Monday morning. If the market can discount the probable rising gasoline prices, spin the destruction rebuild as a positive, and get the shorts to cover, then we could see a limited rally.

Our Trading System - What The Numbers Are Telling Us

We continue to use fast optimized MACD parameters (14-18-9) on a daily NDX chart for our model. We appear to be closer to a top than a bottom. The markets are vacillating between optimism and despair trying to find out where the next major trend will take us.

The daily stochastic is right at the 20 level, not being grossly oversold. The Ultimate Oscillator touched the 30 level and bounced. Are these indicators telling us that we are at an interim bottom? There is a possibility that we could see a little bounce next week even on bad news. The volume has picked up, but is still only at the 60 EMA average. The market is wandering here after taking the punches from 2 hurricanes. Will it recover or collapse? We will definitely know if the signal changes to a buy when we see massive volume on big upside days.


NDX - Revised 6 Month Daily Chart Model - Friday Sep 23, 2005

What About Gold? - The gold miners took a breather this week, but only lost one percentage point even as the dollar index rose for the third straight week. Looking at the relative strength chart below, we see that the ratio of the Gold Bugs Index ($HUI) to the US Dollar Index ($USD) is back near multi-year highs. I also checked using Newmont Mining as a proxy for the Gold Bugs and this ratio is near 10 year highs.

It appears that the gold rush could stall here unless we see a drop in the US Dollar index . On the other hand, if the dollar holds or moves down from here and gold continues its ascent, this could be a very bullish breakout indication as this ratio moves to new highs.


3 Year Weekly $HUI / $USD Relative Strength

What Is The Current Market Sentiment?

The VIX reversed last week's downtrend and was up on the week. The CBOE Total P/C ratio included a spike to 1.41 this week. This spike generated a "bullish alert" on our model. A bullish alert means that we could get a market rally sometime in the next 5-10 trading days. As trend followers, Market Listeners must beware of trying to predict what the market will do, even when we have a good leading indicator like this week's $CPC spike. With the VIX moving higher, we could get some more downside to the NDX before we see the need to close out our Sell signal.

We would like to see some capitulation selling before the market reverses to the upside. Early reports on hurricane Rita indicate that the Baytown refinery may have dodged a bullet. The markets may interpret the possible limited damages as a sign to rally.

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

The $CPC, Ultimate Oscillator and Stochastic are indicating that we are short-term oversold. Our fast MACD may be stalling its downward momentum and be ready to rise. We must watch carefully to determine the market's posture on Monday. Is the market ready to rally? They may put the bad news behind them. Next week we have some confidence and economic numbers which could be market movers. If bad news doesn't cause the market to sell-off, then we will be off to the races and must quickly shift from a Sell to a Buy signal!

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 Thursday Sep. 15
Fault Tolerant Cash Safety Stop - For the Week of September 26, admit failure and exit to cash (RYMXX) on a daily close of NDX above 1610.

Early Exit - In order to protect our position, we will take an Early Exit of 50% or our RYVNX on a daily close above 1590 which was our entry point.

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 Listener Trend Indicators

Trends
NDX 100
ZigZag Trend ZigZag Pref % 1 Approx One-Way
Snap-Shot Trends
ML Trend 2
Index
1 Month
Aug 1
Down (4.5%) 5% 2 Months 5
2 Month
Jul 1
Up (8%) 5% 1 Month 5
3 Month
Jun 1
Up (2%) 5% 1 Month 5
6 Month
Mar 1
Up (5%) 5% 2 Months 10
12 Month
Sep ‘04
Up (16%) 5% 4 Months 20
1 The Preferred ZigZag % is that percentage that gives us up and down trends that are typically 2-3 months in length which work well in our system. Shorter trends are more difficult to identify. Longer trends require dynamic slowing of parameters. 2 The ML Trend Index is a gross approximation of trend conditions which permit us to profit from trends. Our model profits best on index numbers above 10.

Signals & Results

(YTD Gain/Loss with RYVYX & RYVNX approx. + 28.4 % as of Sep. 23 Close)

Recent Signal Slo. Stoch.
(fast)
StochRSI
(fast)
ROC
(fast)
MACD
(Variable)
ML Signal 3
Sep 15, 2005 Sell Sell - Buy Sell
Sep 14, 2005 Sell Sell - Buy Cash
Sep 07, 2005 Buy Buy Sell Buy (mod.) Buy
Sep 06, 2005 Buy Buy Sell Neutral Cash
Aug 08, 2005 Buy- Buy Buy Buy Sell
Aug 04, 2005 Buy Buy Buy Buy Cash
July 08, 2005 Sell Buy Buy Buy Buy
June 24, 2005 Sell Sell Sell Buy- Cash
May 13, 2005 Buy Buy Buy Sell++ Buy
May 06, 2005 Buy Buy Buy Sell+ CASH
Feb 11, 2005 Sell Sell Sell Sell Sell
Feb 04, 2005 Sell Cash Sell Sell Cash
Jan 14, 2005 Sell Sell Sell Buy Sell
Dec 31, 2004 Buy Buy Buy Sell Cash
Aug 27, 2004 Buy Buy Sell Sell Buy
Aug 20, 2004 Sell Buy Sell+ Sell Cash
Aug 06, 2004 Sell Sell Sell Sell Sell
3 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. Our trend following system dynamically adjusts parameters based on current market conditions including volume and sentiment factors.
With Rydex Dynamic funds, we can trade in the morning and 5 minutes prior to the close during the trading day/week when we see that one or more of the fast signal indicators have changed signals. This is particularly important if we need to go to a CASH position in order to preserve capital. The above table shows the results of the Adaptive System Model Signals.

Listen To What He Says

NAB Psalm 89:5-9 The heavens will praise Your wonders, O LORD; Your faithfulness also in the assembly of the holy ones. For who in the skies is comparable to the LORD? Who among the sons of the mighty is like the LORD, A God greatly feared in the council of the holy ones, And awesome above all those who are around Him?

O LORD God of hosts, who is like You, O mighty LORD? Your faithfulness also surrounds You. You rule the swelling of the sea; When its waves rise, You still them.

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

Best Profits,

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