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He Who Hesitates - Are You Listening?

Opening Whisper

From "The New Dictionary of Cultural Literacy, Third Edition" 2002

He who hesitates is lost. A person who spends too much time deliberating about what to do loses the chance to act altogether.

The equity market is giving each of us a final chance to make our investment goal numbers for the calendar year. To hesitate at this point may be to lose out on what might be a great opportunity at year end. Give the charts a final look and place your trades my friends. There are many forces at work on stock prices as we start the final quarter of 2005. Corporate profits are good. Fourth quarters in recent years have been periods in which stocks have rallied sharply. The worst part of the reductions in oil and gas production and distribution through our Gulf Coast may be behind us. GDP numbers look good. But maybe we should hesitate in our bullish fervor.....

Mind the gap!

Those of you who have traveled the London Underground subway system are familiar with that phrase. It is a warning to commuters to step over the gap between the platform's edge and the "carriage". I thought it would be a good slogan for those of us who actively pursue profit opportunity in an ever-changing and sometimes bifurcated market. There is great tension between the bulls and bears as we have seen already in the first two weeks of October. On one hand we know there are good aspects to our economy and we have seen a great bull run in stock prices since early 2003. But what effect will higher energy prices have on our economy and consumers in the next year? Inflation expectations are growing as evidenced by this week's headline CPI number and rising yields on treasury notes. Next week we get the PPI. Michigan Consumer Sentiment was lower than expected.

There appears to be a large gap between what Wall Street is saying and what Wall Street is doing. In case you haven't really looked at the big picture, let's just point out that all of the headline U.S. stock market averages are negative on the year! If Wall Street really believes all of their bullish rhetoric we have heard this year, then where is all of the money that should have gone into stocks? It didn't happen this year. But the rally cry is undiminished and they may yet try to get the markets back into the black by year's end. Wall Street's Christmas bonuses depend on it.

So where is our next trading opportunity to be found? How is the equity market going to close out the year? Overall CPI inflation is climbing at a 4.7% pace year-over-year. Most of that increase has been accounted for in rising energy prices. It seems that the increased energy prices have been absorbed by companies not wishing to pass those costs along to their consumers. But perhaps that factor is changing. Many companies like utilities have an automatic pass-through to consumers. Ouch! Others have some discretion in how much of their increased energy costs to pass along. More companies are announcing that they will pass their costs on to consumers. In any case, the consumer is eventually going to take the hit. And Wall Street is aware of that fact. So the only question is; can they rally stocks going into the year and put off the inevitable until 2006?

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The current market trend is telling us that the bulls have a very heavy load to carry if they are going to rally into year's end. Because the markets are always forward-looking, they are burdened with the falling consumer sentiment and less than perfect outlook for 2006. Perhaps not a recession, but general malaise for the economy. Our powers of prediction are nil or none, so we will rely on the tactic that has given us some considerable profit this year. Follow the trend into the end! Our trend following philosophy with close stops will aid us in deciphering how to profit into the end of the year. At present, the trend is down. Will the Nasdaq rally since mid-week carry over into something more profitable?

This Newsletter is provided to those who are interested in looking for an alternative to the "buy & hold" investing mentality. This information is not intended as trading advice. It is intended for your information and education only. You should consult a Financial Adviser before attempting any trading strategy.

This Week's Technical Perspective: Most of the major indices were down a fraction of one percent, with the Nasdaq Composite and Russell 2000 down 1.22% and 1.74% respectively. Though equities recovered some of their big Monday and Tuesday losses on Thursday and Friday, the plain fact is that the weekly charts reveal the continuation of last week's down trend. The Dow, S&P 500 and S&P 100 are all well below their 200 day moving averages. Their charts look very bad going into year end.

TREND FOLLOWING COMPLIANCE: The NDX lost 0.75% on the week giving us a 1.5% profit and further confirming our sell signal and compliance with the current down trend.

Shown below is the relative strength of the Russell 2000 vs. S&P 500. The weekly chart is confirming the downtrend as the RUT leads the selling. We can expect to see some gyrations next week, but keep your eye on the Russell to see if there is a possibility of a rally into the end of the year. The weekly stochastic at the top of the chart and the MACD at the bottom are both telling us that the "trend" of this ratio has gone negative and it will take a big wide turn to reverse its course.

Based on this chart and the fact that major indices are below their 200 DMA's, longer term mutual fund investors should move to cash or hedge their long portfolios with some amount of bearish funds. We are coming off of recent 4 year highs in the markets and considering what may lie ahead in 2006, we cannot be very optimistic. Cash could be a good thing for investors with trading restrictions in their mutual fund investments. Check with your financial adviser.

1 Year - Russell 2000 / SPX Ratio

Our Fault Tolerant Cash Safety Stop is calculated as of the close on Friday to be 38 points. The lowest closing price of NDX last week was on Wednesday at 1521. Our stop then becomes 1521 + 38 = 1559. Any daily close of NDX above 1559 next week would cause me to go to 100% cash and may give us a weak Buy signal. NDX closed the week at 1544.29 so our stop only gives us a 15 point cushion (1%). That could evaporate quickly next week.

Subscribers will receive an email with instructions and a revised trailing stop level if the market sells off sharply next week. If the markets rally and hit our stop, we must quickly decide if the markets have shrugged off all bad news and are going to rally into year end. Market Listeners will get those instructions via email. Market Listener Founder discounted subscriptions will be available only until October 31 . For details send an email to: subscribe@MarketListener.com with "FOUNDER" in the subject line.

RISK ASSESSMENT: We have seen SPX fall below 1200. That support level has now become resistance. If a rally attempt is made on the 1200 level (SPX currently 1186) which fails next week, then that would be extremely negative for the averages into the end of the year. If the market breaks out above 1200 there would be great risk to our sell signal and we would probably transform to a Buy signal.

Our Trading System - What The Numbers Are Telling Us

This week I have modified the chart to make it a little more readable. The ROC was doing nothing for us at this point, so I removed that indicator. So let's now review what the model chart below is telling us.

Slow Sto - Stochastic : Remains in down trend sell signal. As we can see from late August, it may still be possible for stocks to rally and turn that indicator around. However, our expectations are that this indicator is going to fall into the end of the year and go below the 20 line.

StochRSI - This indicator has gone fully oversold and has no where to go but up. This very fast indicator however, can stay oversold for some time as witnessed by what it did in early 2005. I would sit up and take notice if StochRSI moves above 0.50.

Volume - Notice that volume has been heavy for the last 5 weeks as prices have been falling. The heavy volume is confirming the move down. We will look at up volume if a rally occurs. Weak up volume days will whisper that the rally could stall.

MACD - Our upper MACD ( 12-26-18) has just made a crossing of the zero line further confirming our intermediate term sell signal.

You can read more about these indicators at: http://stockcharts.com/education/

NDX - 1 Year Weekly Chart Model - Friday Oct 7, 2005

All of this week's NDX indicators are indicating a sell signal. No doubt a rally could occur here and our stop is set to help us retain some profit on the current sell signal. But the chart above is telling us that there is some more downside directly ahead.

What About Gold? - The gold miners wound up with a bad week being down about 5.5% across the board. It doesn't look good in the short term.

Newmont Mining (chart below) has lost its upward momentum and looks to have to retreat and consolidate if it is going to move any higher. I own some gold stocks and I may look at buying some NEM put options next week if the move to the downside looks to continue.

2 Year Weekly - Newmont Mining

What Is The Current Market Sentiment?

As expected the VIX and CBOE Total Put/Call Ratio ($VIX & $ CPC) moved inversely with market prices by rising dramatically early in the week and then settling back to provide slight increases in both sentiment measures. The 8 day moving average on the $CPC has moved above the 1.10 line which is territory not seen since May of 2004. (Chart below) This extreme in this 8 DMA for the put/call ratio is a very bullish signal over the next few weeks.

One Month - CBOE Total Put/Call Ratio (Daily)

The following chart of the Nasdaq New Highs-New Lows reveals that this number has continued to move negative this past week. Its future course is undetermined since the stochastic looks to be favoring an upside move while the MACD is still in full downward momentum.

In summary, the sentiment indicators have paused in their fearsome trends and seem to be looking for support to get moving back into their greedy mode. The $NHNL number is not yet at extreme oversold levels which have generated rallies, but this time may be different because they may be looking for support for their year ending bonus. Hey, a good rally from here might just get the market averages back to even-steven for the year. Wow, wouldn't that be a good thing!

3 Year Weekly - Nasdaq New Highs-New Lows

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

Mind the gap! Our price, volume and momentum indicators are giving us bearish Sell signals. However, our sentiment indicators have gone too far in the fear direction in the short term and must be unwound. It appears that some of the gains on our recent sell signal must be given back if we are listening correctly to the charts. But we will not attempt to predict what next week will bring. The market will tell us what it wants to do. We will follow its lead.

On Monday we get the Empire State index and on Tuesday the PPI. By Tuesday afternoon, we should know where the markets are headed for the next week or two. A continuation of the week-ending rally will take us out of our Sell signal and may move us to a Buy signal.

The SPX has moved below the 1200 level as shown in the below chart. Will it stay in the 1150 to 1200 range or break back above 1200? A failure next week for SPX to break above 1200 will generate a lot of technical breakdown of the averages and could cause continued selling to come in waves as we work our way lower in spite of seasonal tendencies.

2 Year Weekly - S&P 500 (SPX) Support/Consolidation Levels

The Markets Are Whispering - Are You Listening?

So here is our plan for next week. If NDX rises above 1559 on a daily close, exit all NDX/ bearish funds. If SPX rises above 1200, I would go to a Buy signal on the day after the SPX closes above 1200 if it looked like the 1200 level was now going to be support for the rally. He who hesitates is lost!

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 and were advised to close 50% of the RYVNX position on Friday Sept 30. We then went back to fully short before the close on Wed. Oct. 5 and that is where we remain to date.

Fault Tolerant Cash Safety Stop - For the Week of October 17, admit failure and exit 100% to cash (RYMXX) on a daily close of NDX above 1559.

We will issue an email to subscribers next week if we get a buy signal or have a mid-week update of our trailing stop.

NDX ZigZag Compliance Chart - 5%

ML Signals & Results

(YTD Return approx. + 30.2% as of Oct. 14 / 6 mo. Return= 7.8%, 12 mo.= 67.1%)
Slo. Stoch.
ML Signal 3
Oct 05, 2005 Sell Sell Sell Sell Sell (100%)
Sep 30, 2005 Sell Buy - Sell Sell (50%)
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
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 Romans 3:20-24 Because by the works of the Law no flesh will be justified in His sight; for through the Law comes the knowledge of sin. But now apart from the Law the righteousness of God has been manifested, being witnessed by the Law and the Prophets, even the righteousness of God through faith in Jesus Christ for all those who believe; for there is no distinction; for all have sinned and fall short of the glory of God, being justified as a gift by His grace through the redemption which is in Christ Jesus;

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

Best Profits,

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