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Stocks vs. Bonds - Are You Listening?

Opening Whisper

Where are we in the relative strength between stocks and bonds? We will assume that the effect of coupon interest and stock dividends are built into the current prices. The following ratio chart gives us some indication in terms of stocks relative strength. We have chosen to relate the Nasdaq 100 to the 30 year Treasury Bond.


3 Year Weekly - NDX / 30 Year Bond Ratio

A ZigZag parameter of 8% helps us identify the turns in this ratio. The Nasdaq 100 (NDX) has pushed this ratio to the upside and has reached a new 3-year high. Have we broken out of this relatively flat period since late 2003? Are stocks poised for out-performance in the next few months? This ratio is moving in a positive direction giving preference to technology stocks over long-term bonds. Another viewpoint is to wonder whether we have reached a peak in this ratio which will shortly announce the reversal in fortune of stocks in favor of bonds.

Dramatic turns in the $NDX/$USB ratio have signaled minor and major turns in the markets in the past. This ratio is now at a do-or-die level in the upper extent of the range. Should the NDX retreat and bonds rally (rates falling), bonds would thereby reveal a buyer's preference.

What Is The Current Market Sentiment?

The $VIX and $CPC have descended from their recent lofty levels confirming the bullish trend in stocks. They are not yet to levels that would signify a "sell alert" but may be getting very close.

The Bullish Percent Index is a measure of the breadth of the market. It is calculated based on the percentage of stocks in an index or sector which have bullish point and figure charts. In our chart below we look at the Bullish Percent Index for the Nasdaq Composite ($BPCOMPQ)

On this chart we see that the MACD and RSI have joined the BPI in signaling an uptrend is in place. If the absolute levels of the BPI can tell us anything about where the Nasdaq Composite can go during this rally, it is saying that we are just at the beginning of a significant rally.


6 Month - Bullish Percent Nasdaq (Daily)

TREND FOLLOWING COMPLIANCE

The ZigZag chart (below) of the NDX confirms the bullish trend. The strength and speed (slope) of this trend leg conforms well to prior up-trends in May and July. Those prior leg lengths might indicate that we could be about ready for a reversal of some degree before possibly moving higher.


1 Year - NDX ZigZag Trend Compliance Chart 5%

The technicals continue to stack up against the shorts, squeezing them into submission. The NDX has made new highs for the year and continues to jump way ahead of the now rising 50 day moving average and leaving the 200 DMA in the dust. The SPX has not yet broken out to new highs for the year. The next index resistance seems to be with the Dow Industrials which are just 14 points from minimal resistance at a psychological 10,700 and are only 3% away from the magic 11,000 number. Don't you know that the bulls on Wall Street will be smokin' their stogies if they can wind the year up above 11,000!

The three charts below are based on some of our proprietary indicators. These indicators have been optimized for 2005 market volatility and sentiment.


Adaptable MACD - Modified by SPX/VIX Ratio


CBOE Total CALL/PUT Ratio


Market Listener Trend Index
Momentum Based - Modified by Sentiment

The Markets Are Whispering - Are You Listening?

Listen To What He Says

NASB 11-17 "Beware that you do not forget the LORD your God by not keeping His commandments and His ordinances and His statutes which I am commanding you today; otherwise, when you have eaten and are satisfied, and have built good houses and lived in them, and when your herds and your flocks multiply, and your silver and gold multiply, and all that you have multiplies, then your heart will become proud and you will forget the LORD your God who brought you out from the land of Egypt, out of the house of slavery. He led you through the great and terrible wilderness, with its fiery serpents and scorpions and thirsty ground where there was no water; He brought water for you out of the rock of flint. In the wilderness He fed you manna which your fathers did not know, that He might humble you and that He might test you, to do good for you in the end. Otherwise, you may say in your heart, 'My power and the strength of my hand made me this wealth.'"

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

Best Profits,

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