The market’s tone has becoming increasingly firmer as of
late. The many technical, internal and seasonal factors we track suggest that a
modest short-term bottom is being formed. While the bottom has not been fully
formed, we are becoming increasingly more comfortable shifting towards a
Bullish position (however briefly that may be). We would be even more
aggressive if several confirming factors showed improvements.

Regardless, we
find that the elements are slowly coming together to support at least a modest
year end rally, with a short-term bottom made sometime in early-mid November,
and a projected top in mid-December.

The key positive factors include:

NASDAQ Short interest hit a record
high last week; We have historically seen extremes in shorting (especially by
odd-lotters) occurring fairly close to intermediate bottoms.

NYSE Thrust Sessions: occurs when the NYSE’s decline to
advance ratio is 2:1 or greater, and simultaneously has a similar ratio of
up/down volume. This signal has recently hit levels previously reached in May
of this year, June 2004, and of March 2003 – all high fear junctures that were
near intermediate term bottoms.

Nasdaq 52 Week High Lows: As the nearby chart shows, the
cumulative high low index has reached levels that in the past have been good
buying junctures. Do note, however, that this most recent peak is much less severe
than prior periods that formed better bottoms.

A neutral signal:

NDX MACD Buy Signal: Moves over 75%
often precede positive price gains; As of late, this has been near the 50%
level. This has now formed a higher
peak, ending what is thought of as bearish implications. While this is not yet
bullish, its no longer a negative factor.

A negative signal:

The Advance-Decline Line: Market
breadth has been weak. The last 2 days in October marked the first consecutive
back-to-back days of positive breadth in weeks. Further, Nasdaq’s cumulative
multi-year lows in the A/D line has not been a bullish sign for the techs.

All of the above are internal market indicators. They have
little correlation with the Macro-economic data we track, which has become
increasingly discouraging.

We disagree with the Fed: Inflation is Robust, Real Wages are down -2.3% for the
quarter. Total comp costs (also inflation adjusted) are down 1.5%.

Meanwhile, actual Growth — and not the estimated prelim BLS data — is only modest at best.

Thus, our expectations for a rally are modest: a 10% move for
the Nasdaq 100; the SPX runs into difficulties in the 1280-90 area. Dow
Industrials could see 11,400.

Beyond New Year’s Eve we become increasingly
Bearish.

Category: Economy, Investing, Technical Analysis, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

8 Responses to “Bottoming Process Continues”

  1. bill says:

    how can we rally without the semi’s?

  2. pjfny says:

    It seems short interest has been going up structually over time….what impact do the huge long/short hedge funds positions have on the short interest?

    Also, how do we rally without financials (flattening yield curve) or tech (dell waning end demand) leadership?

  3. gary lammert says:

    Just when you thought it was safe to go back into the water…..

    1 November 2005 Update

    52/130/130 Maximum Daily Growth Fractal Completed.

    Like a plane that has gone off the radar screen, the venerable Atlanta based superairliner Delta Airlines, formerly DAL, no longer has a valuation tracing on Big Charts. Delta, Northwestern, GM, Delphi, and
    Ford all share the commonality that, unlike the badly run corporate-like entity known as the United States, they cannot directly tax present day and future day
    citizens to maintain the current questionable promise of their substantial outstanding debt instruments. These private organizations must depend on bottom line profitability in a disequilibric competitive global economy to maintain the promise of their debt instruments,
    their pensions, their health care benefits, and ultimately their economic viability. The nonlinear reality of bankruptcy or imminent bankruptcy and the imminent death of these formerly world class and solid companies serve as canaries in the coal mine for America’s future global economic viability.

    The nonlinear mechanistic imminent fractal decay of equities and asset valuations is, with great probability, at hand. 31 October 2005 completed or nearly completed a maximum growth fractal sequence of x/2.5x/2.5x or 52/129-130/129-130 days dating from August
    2004. A lower high exhaustion gap so technically characteristic of dying markets making their lower highs occurred on 31 October for the NASDAQ. Before falling back at the close the Wilshire TMWX, likewise, showed minutely exhaustion gaps to lower highs in the last hour of trading.

    The final decay daily fractal equity sequence will likely either be a 6/15/15 or a 7/17/17 sequence, the former starting 3 days ago and the latter starting 4 days ago. (The other possibility is a splitting of the difference with a 6 plus/16/16 decay sequence as alluded to in the
    previous EF posting).

    One other less likely, although nostalgic solution, is an exact replay of the 1929 11/27/27 decay fractal sequence. The count on this possible sequence is: 11/19 of 27/27. This has some appeal because maximum growth in the second decay fractal would be a fib ratio of the base, i.e., 1.62 x11 = 18-19 days.

    All of these fractal decay solutions end in 31 to 35 more trading days for completion of the primary decay fractal.

    A corroborative litmus test in the next few days for the coming equity devolution could be an expected decline in TNX and TYX, the ten year note and 30 year bond respectively, even as the fed fund rate is raised (albeit, very temporarily) to 4 percent. Exiting money from
    equities, will flow into the debt market, lowering interest rates. Likewise, three month treasuries IRX ‘struggling’ to match the 4 percent fed fund rate because of the money exiting from equities will also provide early evidence that the devolution is in its beginning stages.

    Just like the formation of galaxies and hurricanes and nautilus shells, the universe of the macroeconomy operates through non stochastic fractal growth progression and nonlinear decay. Expect the unexpected.
    Gary Lammert http://www.economicfractalist.com/

  4. SoCal Chris says:

    Since the Nasdaq ytd low and high occured within about a three month span, is it reasonable to split the difference and forecast it well end the year halfway between these to extremes?

    Or, a post-earnings drop in volatility might mean that the market trades more “aggregately”. Thus, a drop in oil prices may result in a broad advance for stocks. (I read a report about significant orders for Russell 2000 calls.) However, this “aggregate” effect would also mean that any macro data could be compelling. But will there be any potentially significant bearish indicators before the holiday consumer results are reported?

    Sometimes when I’m trying to solve a problem I re-word the question. Thus: What could stall the market right now?

  5. Thijs says:

    @gary lammert, can you put that in words so normal people can understand? I’ve partially grasped it (I hope), but why not make a short understandable summary from it?

  6. Andy Nardone says:

    Based on nothing more than anecdotal evidence, I get the feeling no one is really fearful of this market. Everyone is ginned up for a year end tech-lead rally.

    Me thinks we need ‘mo fear.

  7. ursa boursa says:

    Market actually been rallying-now around 5%ish-for good 3 weeks; perhaps top watching might be most
    appropriate at moment.

  8. calmo says:

    The mini-bull that Barry sees based on the recent path just plowed is at odds with the ‘fractal’ account given by gary looking at the same furrow. One (that’d be me) is tempted to look at personal savings and think that does not auger well for the market.
    That would be forgetting that the bulk of the market participants, the money managers, are beyond savings and looking to either cash out or re-invest. Like the corporations and their respectable profits, are they re-investing or holding back for M&A offensives? Hard to make the case out for the mini-bull, no? A micro bull maybe…