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2006 In Review

Bi-Weekly Stock Barometer No. 144

Dear Subscriber,

Here's a look at our buy and sell signals for 2006 and what we expect going forward.

First and foremost, if you find this commentary interesting, you can join me in my daily publication and get these buy and sell signals for yourself. Click here to subscribe to the Daily Stock Barometer.

When it comes right down to it, a market timing service is all about the quality of its signals. But it's important to note that the performance of any system is going to be a function of the action of the market and the ability of the system to deliver profits based on that action.

You see, for the most part, a market timer sees the market as a sin wave. And the most important component of any sin wave is frequency. A high frequency, and you're looking to play short term action. A low frequency and you're looking to position in longer term moves.

The barometer is a series of algorithms designed to 1) get you in as early as possible on a short term market swing and 2) stay in that swing as long as possible. So the barometer is going to profit most from mid term trending moves. And here's what those signals look like:

2006 has not seen its share of these trending moves. 2006 has been characterized by sharp quick moves and consolidations. The two trends we did see allowed the system to obtain 18.5 and 11.4% gains, but these were eaten into by 3 sharp moves against the system. In hindsight those looses look easy to avoid - but that's the nature of trading - it's not done in hindsight - and the more you think in hindsight, the more likely you are to fail in your own trading.

Most people can't think without being influenced by hindsight - in trading and in business. It's unfortunate; they can't admit that they wouldn't have made the same decision now as they would have in the past because they can't separate what they knew - with what they know. Having an executive position in a major firm and running my own trading advisory firm gives me a greater appreciation of this than most. But back to my expectations for the remainder of 2006.

When I do longer term forecasting, I do a series of cycle works and present them here in a forecast and give specific dates. Here are those dates put on a chart I call my "Potential Cycle Reversal Dates:"

As you can see from these dates, they're surprisingly accurate and they influence our system in a way that you can only find out by subscribing to our daily service. As you see the daily action of the market and how a market timer breaks apart its action and predicts when to buy and when to sell.

Now at 18.5%, you might think that I'd be happy, but I am obviously not. Granted the QQQQs are trading at a loss for the year, so any positive number is a good one. But I also understand that this performance is based on you trading our Rydex Signals at the close.

Plus I also understand that your performance depends on when you signed on as a subscriber. Unfortunately most join us after we've had a great run because they've heard about us from one of their friends or from a timing service that monitors us - just to go through a drawdown or a period where the system and the market don't really do much. As you can see, we're had two periods this year - February through March, where the system yielded 5 trades and -5.9% in returns and the period of August through now, where the system is clearly in a drawdown.

Also note, we issue our signals in the evening so anyone can follow our system. I'm in the camp that you don't need to watch CNBC all day long to be a good trader or to get good returns.

So that's 2006 in review. It hasn't been the best year, but the year isn't over yet and I have forecasted 2 large moves for the rest of the year starting with our forecast of a 10/11 reversal...

On to the charts.

Message From The Markets

Market action is ruled by sentiment and by monitoring market internals and studying sentiment; you can gain reasonably predict future market movements. The basis of the Stock Barometer system is overlaying extremes in sentiment with sound technical analysis to predict the likelihood of future price movement. Each indicator and chart measures the hope, fear and greed of investors and traders from different angles. Follow along with my charts and over time, you'll also learn to understand how to read the markets, which is essential prior to setting up each and every trade.

STOCK BAROMETER CHART

The Daily Stock Barometer is a proprietary measure of market energy. The direction of the stock barometer determines our short-term outlook on the market's direction. A BUY or SELL signal is triggered when the indicator clearly changes direction. If the line is moving up, we are in BUY MODE and if it's moving down, we are in SELL MODE. The black line is a 5-day moving average that we use to confirm changes in direction.

EQUITY PUT CALL RATIO CHART

The CBOE put/call ratio is comprised of two sets of data; equity options and index options. The index component contains items that are used as a hedge, thereby distorting the correlation and interpretation of the indicator. I use the equity put/call ratio. This is one of the most accurate read of investor's fear and complacency.

TRIN/ARMS CHART

Richard Arms developed the arms index. It is also referred to the Trading Index or TRIN for short. It is a measure of the ratio of up stocks and down stocks divided by the ratio of up volume and down volume. Our Spread Chart converts the arms index data into momentum Buy and Sell Signals.

TICK CHART

The tick index is represents the sum of all stocks ticking higher minus all stocks ticking lower (a stock is said to be trading on an up tick when it trades at a higher price than the last sale). It's utilized as a day trading tool as it gives you an up to the second read of the intensity of buying and selling.

BREADTH (ADVANCE - DECLINE) CHART

Each day several thousand stocks either advance, decline or remain unchanged. The number of advances and declines normally ranges from +2500 to -2500. A high number of advancing stocks normally marks a top just as a high number of declining stocks normally marks a bottom. Monitoring the 5 and 13-day moving averages of this allows us to better predict future prices.

VOLATILITY CHART

The VIX is a measure of volatility on options pricing. We use the old VIX, which is now called the VXO. The higher the volatility, the more likely the market is close to a bottom, as traders are willing to pay more premium for puts, which act as Insurance on their long positions.

Cycle Time

Monday is day 13 in our DOWN CYCLE.

The Stock Barometer signals tend to follow a 5, 8 and 13 and sometimes 21 day Fibonacci cycle that balance with 'normal' market cycles. Knowing where you are in the current market cycle is important in deciding how long you expect to maintain a position.

Potential Cycle Reversal Dates

2006 potential reversal dates: 1/16, 1/30, 2/25, 3/19, 4/8, 5/8, 5/19, 6/6(20), 7/24, 8/20, 8/29, 9/15, 10/11, 11/28. We publish these dates 2 months out.

We've added our next date - which if you ask me suggests that we may see yet another push higher into October 11. I know our forecast is for 10/11 to be a low - and if it is, then we'll likely see a strong rally into the end of November. The key is interpreting the proper cycle - whether they're a high or a low or not. So stay tuned as these dates are often correct.

My timing work is based on numerous cycles and has resulted in the above potential reversal dates. They're predictive and have nothing to do with the barometer cycle times. However, due to their accuracy in the past, I post the dates here.

2005 Potential reversal dates based on 'other' cycle work were 12/27, 1/25, 2/16, 3/4, 3/14, 3/29, 4/5, 4/19, 5/2, 6/3, 6/10, 7/13, 7/28, 8/12, 8/30-31, 9/22, 10/4, 11/15, 11/20, 12/16.

Stock Barometer Buy And Sell Signals

QQQQ or SPY Chart: A chart is provided in every bi-weekly report and shows the barometer Buy and Sell Signals (which are provided in my morning updates) as well as showing the next highlighted 'reversal' window. The numbers adjacent to the buy and sell signals are the number of days between signal (cycle time).

Here's one years of our end-of-day buy and sell signals for the Stock Barometer over the past year. They're marked on the QQQQ chart with red and blue lines (or red and blue arrows).

 

10/11

Projected Next BOTTOM Due (25 days)

 

9/6

TOP (15 days)

 

8/15

BOTTOM (4 days)

 

8/9

TOP (12 days)

 

7/24

BOTTOM (10 days)

 

7/10

TOP (29 days)

 

5/26

BOTTOM (33 days)

 

4/10

TOP (8 days)

 

3/29

BOTTOM (6 days)

 

3/21

TOP (5 days)

 

3/14

BOTTOM (10 days)

 

2/28

TOP (8 days)

 

2/15

BOTTOM (23 days)

 

1/12

TOP (6 days)

 

1/04

BOTTOM (31 days)

 

11/29

TOP (28 days)

 

10/19

BOTTOM (10 days)

 

10/5

TOP (4 days)

 

(historical reversal dates and performance figures are published at the bottom of the home page)

The following work is based on my price based spread/momentum indicators for the USD$, XAU, GLD and TLT. They are tuned to deliver signals in line with the Stock Barometer. Combined with up/down indicators and you have a powerful tool for pinpointing market reversals.

Gold (GLD:AMEX & INDEX:XAU.X)

I monitor Gold in the form of GLD and the XAU as well as the US Dollar Index as a general guide to the overall health of the US Economy and the markets, as well as to assist us in the entry of positions in our Gold Stock Service.

Bonds (Amex:TLT)

I include bonds in our studies and use Lehman's 20 year ETF, as the direction of bonds can have an inverse impact on the stock market. Normally, as bonds go down, stocks will go up and as bonds go up, stocks will go down.

Summary & Outlook

We remain in Sell Mode, expecting the market to move lower into 10/11.

More importantly, we see the potential for an even larger move setting up after the 10/11 date running up into November.

This action would be ideal for our system and give us a couple good trades for the end of the year as we enter a seasonally bullish period.

And I think gold is also forecasting that 10/11 is an important date - as we see gold consolidating the recent sell off into 10/11 and then moving sharply lower for the rest of the year - in alignment with a potential stock rally into Thanksgiving.

Again, if you're new to the biweekly stock barometer, welcome. This article comes out every 2 weeks and gives a big picture view of the market and our recent activities. I've been writing this article for some time now (since this is #144). If you're interested in following our signals and learning more about our system, then I invite you to click here and subscribe to the daily service - since the market can turn on a dime and so to can our interpretation as the market gives its daily clues to the future.

Have a great Sunday.

As always, if you have any questions or comments, feel free to email me here at jay@stockbarometer.com.

 

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