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Sol Palha

Sol Palha

Sol Palha is a market analyst and educator who uses Mass Psychology, Technical Analysis and Esoteric Cycles to keep you on the right side of…

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Market Update

The information in this article has been extracted from the June market update with one new comment from the July update.

"O reason, reason, abstract phantom of the waking state, I had already expelled you from my dreams, now I have reached a point where those dreams are about to become fused with apparent realities: now there is only room here for myself." ~ Louis Aragon 1897-1982, French Poet

Moving averages of new highs and New Lows
Moving average New Highs New lows
20day 1210 457
100 day 670 230
I year (365 days) 560 135

Normally we would be inclined to call this a spectacular turn around given that the number of new highs are dramatically outpacing the number of new lows. However this change is occurring when all the big traders have left and so while it's a positive it's not something to focus on as the numbers are distorted due to the fact that the markets are very easily manipulated during these time frames.

Standard Deviation Analysis

The premise here is simple. When either the +3sd band or negative -3Sd bands are hit; it suggests that an oversold or overbought condition is in the works. Example if the market is topping and the +3SD band has been hit each time then it would indicate that there is a pretty good chance of rather sharp downward move occurring and vice versa. If we are in an up trend, meaning that the +3Sd band was hit and the markets have pulled back. A test and the ability to hold above the 18 or 30 day moving average would indicate that the markets will most likely rally to test the +3Sd bands again. This tool should be used in conjunction with 2-3 other TA tools or simple trend analysis. One should never make a judgement based on this tool alone or any other individual tool; always use 2-3 tools. The more TA tools use familiarize yourself with the better. However one should not exceed 6 tools as you will most likely overwhelm yourself. Ideally 3-5 tools should suffice.

Standard Deviation Dow NASDAQ
+3Sd 13791 2677
+2Sd 13685 2651
18 day SD moving average 13473 2600
-2Sd 13261 2549
-3Sd 13155 2523

Difference between -3Sd and +3Sd bands

(15 weeks worth of data provided below; updated on a weekly basis)
Index 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Dow 636 796 738 655 661 902 1163 1424 1214 774 779 800 858 974 1619
Nasdaq 154 157 178 178 110 115 139 178 212 185 175 198 220 226 397

Highest value between the -3Sd and +3Sd band for Dow = 1619 (March 13, 2007)
Highest value between the -3Sd and +3Sd for NASDAQ= 397 (March, 13, 2007)

The SD bands in the Dow expanded a bit last week but we stated that this expansion was nothing significant; this week the bands have contracted over a 100 points more then making up for that small expansion. The NASDAQ also experienced a small contraction. One interesting development we have noticed after paying close attention to the charts is that if the bands continue to tighten without a significant correction; then the market or stock usually suddenly explodes upward like a coiled spring. However this action has to go on for sometime; in a way it's like an invisible correction.

The buying spree by private equity firms continues and thus continues to shrink the pool of available shares for mutual funds, hedge funds and the public to buy. This means more money is chasing fewer shares and so the upward pressure continues to build which is yet another positive. The black stone group has agreed to buy out Hilton hotels for 18 billion dollars in cash; it's truly amazing how much money is sloshing all over the world and this money desperately needs to find a home. Full Story

The other part of this story is that eventually all these private equity firms are going to dump these shares back onto the market to lock in their gains and the market could then experience a serious correction. Our response to this is so what; yes the markets will pull back and yes they could experience a serious correction but until then they will most likely continue to trade higher. In reality we are really looking forward to such a correction and everyone should be because it would provide some spectacular bargains in the commodity sector; the commodities bull is not going to end for years to come. If one wants to be totally safe then one should tie oneself to their bed and never move. Life is a risk however risk can be controlled and the risk to reward ratio should always be in ones favour before one jumps into any investment or business venture; if its not then the investment should be forsaken. When the markets are ready to really crash a lot of warning signs will be issued and we will be on the lookout for them and we will position ourselves accordingly. It does one no good to sit down and contemplate on what might, could and should happen; for those that do so, a host of opportunities are missed as they desperately wait for that so called disaster to strike. Remember to that at TI we view every single disaster as a hidden opportunity waiting to be discovered.

According to investors business daily US investors withdrew roughly 10 billion dollars from mutual funds that focussed on US stocks in May even though the markets generally were trending higher. In April investors actually committed 1.7 billion dollars to the markets; many analysts would view this as a huge negative but since when has the average Joe (these are the chaps who generally invest in stock mutual funds) ever been right. We have a slightly different take on the situation. The last time investors pulled out so much money was in February 2003; does that ring a bell, it should because a few months later (march-April 2003) the market put in a massive bottom formation and mounted a huge rally. What is interesting is that these chaps are taking this money out of mutual funds that invest in US stocks and deploying into international funds. World equity funds saw an inflow of 11.54 billion dollars in the month of May after receiving over 16.5 billion in April. The small chap is always late to the party; international markets have been on a tear for months on end and the small chap decides to join the party now. In comparison to many of the world wide indices the Dow appears to be pretty cheap; its number 65 in the list of top performing markets and we suspect that many world wide traders will slowly start to sell their positions as the small players flock in. In fact Jim Rogers a rather astute contrarian has sold all his positions in the international markets except for those in China; he stated if the Chinese markets carry on moving upwards at the same pace then he will close even these positions out. Interestingly enough he is bullish on many agricultural commodities something that we have been bullish on our VIP Service now for almost a year. Don't get us wrong we are not perpetual bulls; we also feel that the US markets will experience a rather terrible correction at some point in the future, but in comparison to overseas markets the Dow is really cheap especially if one prices the 30-33% beating the dollar has taken. As stated earlier this year for the Dow to just break even it would have to trade past the 14,000 mark. In comparison most overseas markets have gone to put in a series of new highs and are in real bull markets. Many might say that overseas investors are not going to be interested in investing in the US because of our weak currency. Our response to that is inflation is actually very good for the investor that knows how to position himself; once again this brings our old saying to mind that disaster is nothing but opportunity knocking in disguise. Look at the following examples:

The dollar has lost roughly 30-33% of its value since the middle of 2002

In the same time frame Gold is up over 116%

Silver is up over 173%

Palladium is up almost 157%

Copper is up over 500% and all the other base metals are up several hundred percentage points (Zinc, lead, Iron etc)

Uranium is up a whopping 1400%

Real estate was up several 100 percentage points until the correction/bust cycle kicked in; off course just with everything else those that did not sell are now sitting on a loss or smaller profits.

Individual stocks; literally hundreds if not thousands of stocks are up a 100% plus and we ourselves have had a huge number of 100% plus winners in that time frame.

The list is rather huge so we will stop here.

Now any of these gains more then compensated for the decline in the dollar and no matter which currency you finally convert your dollars into you still would have come out with a winning hand. For this reason while we do not like the fact that the US dollar is declining so much we do not view it at as the end of the world unlike many other writers. Point and case, Zimbabwe which is experiencing a massive amount of inflation actually has the number one performing stock market in the world. Imagine that, oh gosh how could that happen; inflation is at a whopping 1800% but its stock market is up over 12000% percent in one year. Now has that not more then compensated for the rate of inflation; you are still sitting on gains of almost 600%. If it was easy to get in and out of the Zimbabwean markets we would have actually recommended investing in it but its not. When the Argentinean peso crashed and the world thought the end was near we then advised our subscribers to buy property in Argentina; those that listened locked in huge fortunes as prices had plunged over 70%; today prices are up several hundred percentage points. When the Rand was trading at 13.5 to a dollar we advised our subscribers to buy property in South Africa and if they did not have enough money for this to perform a simple currency conversion. At that time the Rand was hated and everyone thought it would drop even more. The Rand went on to gain 100% plus against the dollar; those that invested in property made several hundred percentage points more. The bottom line is that disaster hurts the majority but provides huge hidden opportunities for the astute investor. In the end that's what investing is all about; avoiding the well trodden path the masses take for the hidden path that's almost invisible?

Before we go on we would like everyone to re read last week's market update especially the market commentary section.

This week's market action is going to be light as many big traders left early and will not come back till next week. Even though the market closed up higher Monday and Tuesday the volume was rather light. The press still complains about the high prices of oil, a weak housing market, rising inflation, increase default rates on loans, credit cards etc but the market stubbornly trends higher. It appears to be climbing a wall of worry which is a bullish factor; thus even if it were to pull back say 900-1200 points it would not change our bullish intermediate outlook at all. Though the chances of it pulling back so much are not as good as they were 3-4 weeks ago due to the invalidation of the sell signal on our daily charts.

The small investors (odd lotters) continue to build up their short position and the short interest on the NYSE is still in record territory. Massive corrections have never taken place under such conditions and we do not think that things are going to change now. In fact if one takes a look at the ratio of Public to NYSE specialist short sales, one finds some rather interesting data. When this number is high it's usually bearish as it means public is generally bullish and when it's low it's bullish because it means that the public is generally bearish. Now one does not always get a massive correction when this number suddenly spikes upwards and this as we have spoken in length about is due to the massive amount of money that's sloshing around waiting to find a home.

Larger Image

Chart provided courtesy of www.prophetfinance.com

From August 2002 to Oct this ratio was trading close to an all time low of 1.04; after spiking one last time down in Oct the market mounted a rather huge rally (1500 point plus rally from 7400-9000). In November of last year the figure again dropped to 3.81 and even though the markets were already trading higher and under normal conditions they would have spiked down just as they did in Oct 2002 but did not because of the enormous amounts of liquidity they took off and rallied yet another 800 plus points up until Feb. Towards the end of Feb to early march of this year the number spiked up all the way to 13.15 and the markets mounted a small correction (again liquidity prevented this correction from taking its full course). It appeared that the markets were ready to crash as they had given up almost all their gains but then the numbers started to drop again and the markets rallied once more. Right now the ratio is at 9.00 significantly lower then the 5 year high of 13.15 and this essentially has been taking place in the face of sideways moving market. Note that we recently stated that the markets could either drop down hard and then mount another rally or they could drop down a bit and then trade sideways to build up strength for the next leg up. Sideways movements frustrate most traders and are a good way to wash out excessiveness but the best move would be for a fast hard correction. At this point in time a hard correction is a less likely scenario. Thus it appears that the ratio is slowly moving lower in the face of a sideways moving market. If we couple this with all the other bullish factors we listed last week it does make for a rather strong argument that the markets still have a decent amount of upside left in them before embarking on what most will later call a hair raising correction.

Here are some other minor positives. Despite last Fridays sell off the Dow ended the Quarter up 8.5% (one of its best quarters since 2003), the SP 500 was up 5.8% and the NASDAQ finished up 7.5% for the quarter. These are great numbers considering the huge amount of negative news the markets had to overcome to get here. Now we have stated that the NYSE specialists are not shorting the markets aggressively however at the same time we have what we call Smart Money (the really big boys); they are slowly unloading some of their long positions by selling into rallies. We know this because our Smart money indicator has not issued a buy signal for over 2 years. However these chaps are not aggressively shorting the markets; they are closing out long positions only. Perhaps this could be due to the fact that their long positions are so huge that they need to work months in advance to slowly get out as they are unable to jump in and out of these markets as regular traders are. Or they could be closing some of these positions out because they feel that the markets are going to pull back a bit and give them better entry points. Note when you have billions of dollars a 10-15% pull back in a stock is good enough to warrant selling and re opening the position later. Indeed many of the uranium stocks have pulled back in excess of this, as have many energy stocks, gold stocks, palladium stocks and so on. We do not view this a negative development yet simply because the NYSE Short ratio is too high, the Public/NYSE specialist ratio is in the neutral zone and moving closer to the buy zone (its not trading next to its 5 year high of 13.15 which would be a bearish development), we have no sell signals from any of our indicators on the daily and monthly charts and mass psychology is not extremely bullish.


As we have stated constantly the problem right now is that there is too much contradictory data and one could support either a bullish argument or a bearish argument rather easily. The internet is one of the reasons for this; it's now so easy for the average trader to get his or her hands on the same data that was once only available to professionals. In fact there is so much data out there that sometimes it's just as good as having no data because it ends up confusing most traders. The only way one can attempt to navigate through this maze of gibberish is to use mass Psychology. Right now from a mass psychology perspective the markets are not frothing we do not see excessive bullishness anywhere except maybe for a few isolated sectors. For the most part people are worrying about higher oil prices, higher interest rates, how the housing market is going to affect the stock market and so on. The fact that the market has been able to trade higher in light of all this potentially bad news is truly remarkable and is a very bullish development on its own. Finally let's not forget one other major bullish factor the number of outstanding shares continues to decline rather rapidly as private equity companies are buying out huge public companies.

If you are slightly confused by all the info that's out there, we don't blame you; in fact were it not for our mantra to constantly adjust to the markets we too would be somewhat confused by the current action. Fortunately we decided long time ago that the only way to survive was to constantly adapt and most importantly be ready and prepared to adapt as today's markets seems to be constantly evolving and doing so at a much faster pace then ever before. There is going to a huge massive pull back which the public will term as a crash; the problem is trying to figure out when and if you sit there simply worrying about this event then you are going to end up losing a whole lot before your scenario comes true. Let's put it this way. You sit and wait for that massive pull back but in the mean time the markets run up say 6000 points and then finally they pull back 3000 points and you scream "viola it finally happened you see I was right" and sadly most idiots would feel like this. However note that the markets actually ran up 6000 points and only gave back 3000 points and at which time we are sure they would be building up force for the next leg up and this idiot if he did not close his short position out would end up losing all his profits and then some more of his original capital.

The point of this story is that markets correct; they always have and they always will. Corrections no matter how big should not be feared but generally embraced (you embrace them by preparing for them by lightening up on your long positions and building cash. Thus when the prices hit the mouth watering ranges you can come up and scoop them all up). Go back and look at any long term chart; every massive sell off was always followed by some sideways movement and then a massive move up. In the old days this would take months and maybe years but today the volume of shares that trades in one month is more then most of these exchanges would see in one year If one goes back 20 years and if one goes further it could even amount to 1-3 years worth of volume; today moves that would take years to complete are over and done in months and sometimes weeks. In 2000 the markets started to correct; when the correction was done less then 2 years later the markets had lost trillions of dollars in value. The NASDAQ started to correct from around April 2001 and the correction was over by July to August of 2002; the Dow started to correct from May to June of 2001 and was over by Oct of 2002. One would though that the world would have ended. Instead people jumped into real estate and did exactly the same thing there that ended up bursting the internet bubble. Note what would have taken years and years and maybe a decade was over and done with in less then 2 years. In 2003 the markets started to rally again and both the real estate and stock markets traded up. Today almost no one pays attention to what happened back in the late 2000 to 2003 period.

Bottom line our long term indicators are still suggesting that the markets will mount a rather strong correction towards the end of this year or in the 1st quarter of next year. However the picture can change as we have no way of controlling new developments that could affect the picture; if the situation should change we will immediately notify our subscribers as we have loyally done in the past.

In the intermediate time frames we would like to see the markets correct in the order of 6-9% however we might not get this correction and so the next best thing is range bound movement for several weeks on end. Right now if you are feeling jittery we would advice taking profits from all profitable positions something that we have been advocating for quite sometime. We still feel that the markets are going to mount yet another rally and possibly go on to put in a series of new highs as the Dow is actually oversold when one takes the weaker dollar into consideration. Most world wide markets have gone on to put in true new highs; the Dow is the only one that has not done so as to do so it would have to trade at least 30% higher then its 2000-2001 high which would mean to break even it would need to trade close to the 14,500 ranges. The only reason we say oversold is because if you use regular TA the Dow is overbought but regular TA cannot price in a dollar that has lost 30% of its value. Since the Dow is priced in dollars it only makes sense that it would have to adjust 30% plus just to break even and from that perspective the Dow is oversold.

Finally two other developments to pay attention too;

The SD bands have pulled back over 60% from their highs and this is occurring while the markets are trending sideways so they are now in effect building up energy like a coiled spring and could suddenly explode. While contracting bands are generally a negative when this contraction starts to reach an extreme point it's actually a rather good contrarian signal.

The biotech sector is one of the few sectors that have not been able to mount a decent rally for a long time and it looks like it's just waiting for some excuse to do so. This sector alone potentially has the energy to carry these markets significantly higher should it mount a significant rally. Also the entire energy sector which played a large role in driving these markets higher has experienced a nice silent correction and thus is poised to trade higher. In fact several stocks have already put in nice bottom formations and are trading significantly of their lows.

New Comments

We feel that shorting the markets right now is not a good strategy to employ unless you are nimble trader who is able to jump in and out at a very fast pace. Market Update July 10th, 2007

"Reasoning draws a conclusion, but does not make the conclusion certain, unless the mind discovers it by the path of experience." ~ Roger Bacon 1214-1294, British Philosopher, Scientist


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