CALDEIRÃO DE BOLSA

"Sentiment Dashboard "
by Adam Oliensis



"SENTIMENT TANK: Drained an impressive 10 points to 3% full of negative sentiment. This on an SPX rise of less than 2 points. At that rate a full tank of negative sentiment is worth less than 20 SPX points. Lousy mileage on the day.

SHORT-TERM: Remains essentially in neutral but the bias moved to bullish.

MID-TERM: Progressed 3 points to 33% on the decline side but Confidence remained on the wrong side of 0 at a bullish 1. When Confidence diverges from this oscillator we don't have a signal. Indeed the fact that the market is going up during a window of opportunity for a decline bodes somewhat bullish.

LONG-TERM: Regained the point lost yesterday and progressed back up to 94% on the advance side also with a mild Confidence level of a bullish 1.

BOTTOM LINE: Is the sentiment tank broken? No.



The inverse correlation between the SPX and the level of the tank remains at an incredible -0.90. (Why is this incredible? Because you just don't see that level of correlation in "nature." Especially when Price is no-wise a component of the algorithm that calculates the level of the tank.)

During the June-August period, however, the oscillations on the level of the tank have been in a much smaller range than normal. And that has made it difficult to identify any sustainable momentum. Why? Because there has been none.

Prognosis: With negative sentiment almost down to 0% we're probably headed for a short-term local top on the SPX. Whether that top becomes significant or is just another dip that gets bought, well, we'll "triangulate" that calculation as we go. If the market finds buyers with the tank below 35% then the current bull phase will continue. If the buyers don't come in until the 50% area on the tank, then we're in no-man's-land. If the tank starts living up around 50% and above, then the odds are that the bear is on the prowl again. "

FRIDAY a.m.
September 5, 2003




"Inflation and Stock Cycles"
by David Nichols

"Although this chart is a little hard-to-decipher, I think it's one of the most fascinating charts you'll ever see about the stock market. So it's worth spending a little time this morning mulling it over.



This chart is from a book called Stock Cycles by Michael Alexander. I mentioned the other day that we're in the final stages of publishing Mike's next book, and we're also putting the wraps on a special 5-part online course by him, about his unique insights into market history and economic cycles. All of this is coming soon, to a 21st Century Alert web site near you.

But for now, let's dig into this little chart. The upper lines show earnings growth during two different periods, 1966 to 1982 (highlighted with a red arrow) and 1982 to 1999 (highlighted blue).



All in all, there was remarkably similar earnings growth during these two periods. But if we look at the way stock indexes performed during these periods, a vastly different story emerges. Highlighted in the same way below are the stock returns during these two periods.



The early period from 1966 to 1982 was disastrously flat, leaving buy-and-hold investors with a big fat goose-egg for returns after 16 long years. Yet the next period -- with very similar earnings growth -- saw the biggest bull market in history. As an aside, this chart shows that earnings and P/E ratios just aren't that great at predicting bull and bear markets -- something which experience has taught most market followers anyway.

It's inflation that ultimately determines the outcome for stocks -- not earnings. This is a startling fundamental concept, to be sure, but how else to explain the above charts? 1966 to 1982 saw rampant inflation, with the future earnings streams of companies heavily discounted and shunned by investors. During the bull market, which coincided with a lengthy period of contracting inflation (indeed, it was thought that inflation had been "conquered"), P/E ratios could go to the moon as future earnings were perceived to be worth astronomical sums.

It's well-known that the Fed is now pumping liquidity into the system at a furious rate, pegging interest rates at generational lows and hyper-stimulating inflationary forces in the economy. Be careful what you wish for!

With ballooning debt and federal deficits, and global central banks racing to competitively devalue their currencies -- which involves keeping the monetary printing presses humming night and day -- then the world is being flooded with mountains of new paper currency. Much of the new U.S. paper is going to fund our massive current account deficits and huge deficit spending. (I read an interesting fact a few days ago from Richard Russell that it's costing the U.S. $4 billion a month to be in Iraq, and the entire GDP of Iraq is only $2.5 billion per month -- an amazing example of deficit spending gone crazy....)

The point is that eventually "reflation" and flooding the system with money will turn into actual "inflation". Maybe somebody should call the deposed financial czars in Argentina to see what can happen. And as the charts above show, with inflation on the rise the stock market has a much tougher time going up, as future earnings streams get devalued, and devalued, and then devalued some more.

So this is quite the trillion dollar experiment the Greenspan Fed is conducting here, in real-time. A hyper-stimulating bout of inflation can lead to a much longer, more protracted bear cycle. But at this point, there's really no other choice for the U.S. than inflation. Our huge debts and continuing-to-expand deficits require inflation.

There's absolutely no way we can re-pay all the money we are borrowing and spending. So the only way to manage this debt is to make it worth less. We've got to get to the point where $44 trillion in debt doesn't "seem like that much". That means the Fed and the government have us on a course to absolutely decimate the value of the dollars in your savings account.

This is also why we're seeing the early stages of a bull market in gold, silver, and commodities. It's a natural by-product of this hyper-stimulation, in that the early recognizers gravitate towards hard commodities. But the reflation plan has the stock market so excited, at least for now. But the long-term implications of our current course just aren't that exciting -- at least not if history is any sort of guide.

I'm going on about this topic this morning because not a lot happened in the market yesterday. An early drop was met with a slow grind up into the close. This is has been the everyday pattern lately. But the red candles are starting to look a little more ominous, the higher we grind.

If it grinds up to SPX 1040, we're going to want to load into a low-risk/high-reward short position. This would be especially juicy if there was some sort of blow-off top up to that level, but we likely won't get that chance. It's never that easy. Either way, the bear case is alive and well -- just in hibernation -- and any day now we should see the bullish crowd start to come under mounting pressure. We'll re-load into shorts at a moment's notice, once a sentiment shift is underway, and the vast bullish majority starts to feel some heat."