A Puny 25 Basis Points
by David Nichols
I'm very pleased to announce that Tim Wood has joined 21st Century Alert, and subscribers will now have access to his excellent monthly advisory service called "Cycles News & Views". Subscribers can access his current issue from the home page of our Web site.
Tim Wood analyzes long-term technical cycles in the Dow, Gold, Bonds, and the Dollar, using a combination of cycle analysis and Dow Theory. This is a unique, fascinating way to look at the markets, which leads him to very specific predictions and forecasts for the coming cycle. Right now Tim is building a detailed case that the stock markets are set up for a big decline into a major "seasonal cycle" low. I encourage everybody to read his latest issue.
After all the excitement yesterday, I got a number of e-mails asking me to re-cap the "Fed flurry." Here's how it looked at 2:15pm yesterday:
Traders didn't like the puny 25 basis points -- they wanted the big, macho 50 basis point cut. They also didn't like the Fed's pusillanimous statement, which said (to paraphrase): "We think the economy is doing great and is stabilizing nicely.....except we can't see any actual evidence of this."
There looks to be a growing understanding in the deeper layers of the market's collective psyche that the flow of easy credit is drying up, simply out of exhaustion. Obviously the Fed would cut rates into negative territory if they could, and if we weren't already at 1% on the Fed funds rate, Alan Greenspan would definitely have given the market its 50 basis points. He doesn't like to disappoint.
But disappointment was the outcome nonetheless, which was always the likeliest conclusion. Too many bulls have been on the bandwagon, and even the hot money has climbed aboard. True to form, that flurry of downticks immediately after the announcement was the "tell" that the market was going to give it up into the close, after the requisite juke back up.
So where does this leave us now? Likely on the verge of a larger pullback, that could transform into something even bigger given the right set of exogenous circumstances. The market is vulnerable right now. Bad news will not go over well.
Yesterday's decline was important in a number of obvious technical ways. The SPX broke the big uptrend line from the March lows. It also failed right at the widely-watched 20 day moving average, after having been above it during the early part of the day. It also left an "outside day" down, where the high and low were wider than the previous day. This is only important because they will be widely recognized technical signals.
The VIX is still stuck in its narrow range in the low 20s. This was good for the bulls on the way up, but now it's not looking so good for them on the way down. The most bullish thing would be for the VIX to be breaking out to higher highs as the SPX tumbled down over 40 points from the high, but this hasn't happened. It's been a very small pop up in the VIX.
Nobody is too scared of this pullback, at least not yet. If the hot money doesn't start loading up on puts again, then there is a great chance this could develop into a much bigger "long squeeze", where the bullish majority faces eroding prices without the benefit of shorts around as natural buyers at lower levels.
All of this has been helping our bearish position in the Rydex Tempest fund, which is still underwater but is now heading firmly in the right direction. Now we're seeing at least some consolation for being the only bear that didn't "say uncle".
But here's the interesting thing: Since everybody else gave up, there just aren't many bears around at all. And the bears that are around just don't have the stomach to take on this market, at least at the moment. That leaves a whole bunch of bulls waiting for a rally. I'm hearing lots of talk about "window dressing" and such, but so far that hasn't mattered one bit.
The problem is there are too many bulls. The market is in a very dangerous spot, and will continue to be until the bulls have been completely flushed out. This is a process that will take months to fully play out.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: Filled by 1.5 points to 3% full of negative sentiment. Despite the down move late in the day there was very little increase in fear.
SHORT-TERM: Remains in a mature decline phase. Ripe to roll into an hourly advance phase.
MID-TERM:Went neutral at 65/35. Our Confidence Diffusion Index (CDI) remains at a bearish 2. The internals are tugging on the gauge to go into a decline phase, if weakly.
LONG-TERM: Remains neutral at 94/6. The weekly CDI is pulling the gauge slightly toward negative.
BOTTOM LINE: As long as the tank sustains in this very low range the underlying tone of the market should be considered bullish. Even with that bullish tone, however, a rise in the tank toward 15% would give the market some negative to burn on another advance phase. If the tank rises much above 15% that would be an indication that a more serious decline was underway.
Enviado: 26/6/2003 14:31