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Final Week

7/15/2007 9:57:31 PM

Impressive move!

We got a break above the resistance at 1540, and this technically ends the ambivalence of the market. This break has also had our system move into BUY mode.

The chart below shows that we now have short-term support at around 1540 and resistance at 1565. Our positions will expire at the end of the week and the upper trend line resistance will be at around 1575 by that stage based on the gradient of the line. Our 1585 sold call still has a reasonable degree of safety, however there's nothing to say that the market can't surpass the resistance. If we need to defend our positions, an email will be issued before Thursday (this is the last trading day for our options).

Position Recap:

On June 20 we sold an SPX Jul 1430 (SXZSF)/1420 (SXZSD) Put Option spread for a net credit of $0.40 (i.e. $40 per $1,000 of margin)

On June 21 we sold an SPX Jul 1585 (SXMGQ)/1595 (SXMGS) Call Option spread for a net credit of $0.70 (i.e. $70 per $1,000 of margin)

SPX Chart

THE 80/20 RULE and SENTIMENT

You may have heard about the 80/20 rule (the Pareto principle), where in many cases, 80% of the effects come from 20% of the causes. In terms of wealth, 80% is held by 20% of the population. Extrapolating this out, I suspect that 80% of the movements in the markets are controlled by 20% of the market participants. The balance of market participants includes groups such as the media, brokers, newsletter writers, Internet chat boards and the average man in the street investor. This balance of participants tend to make a lot of noise, and so you turn on the TV or read the paper and you get a certain impression or sentiment on the state of affairs in the markets, however it's only an illusion of the state of affairs. The Truth is often something completely different and in the past it's been a good bet to go against the mainstream when it goes too far on one side.

An great example is in the days leading up to the Crash of 1929 a broker named Joseph P Kennedy was getting his shoes shined on Wall street when the shoe shine boy said to him that he might want to check out a stock on a company called Otis...they make elevators and the buildings in NYC were getting bigger by the day, Kennedy went up to his office that morning and sold everything he had. He figured that if the sentiment is that bullish on the street, the market is at a top and there's probably very few buyers left to continue pushing prices higher. The market crashed a few weeks later.

Today, our equivalent of the "shoe shine boys" is the Investors Intelligence bulls/bears Report, it shows the sentiment of the bulls versus the bears and when sentiment is overly bullish markets tend to go down shortly afterwards and vice versa. Ultimately though, the market doesn't care about what people think should be happening, it'll usually just do what the majority of market participants least want. At the moment there are a lot of people that are short in the market (meaning they have sold stock they don't own) and so when the market makes a new high, these people get squeezed until the pain gets so much that they change from bears to bulls and that's the time we'll be at a top.

Feel free to email any feedback or questions you may have to angelo@stockbarometer.com.

 

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