Newsletter

February 11, 2006

Don't Quit

Market & Sector Review

Largest Changes This Week

This Week's Economic Reports

Don't Quit
By:Vic Johnson

"Your circumstances may be uncongenial, but they shall not remain so if you only perceive an ideal and strive to reach it. You cannot travel within and stand still without." – As A Man Thinketh

For many years I have carried around a poem called Don't Quit. One of the lines says, "stick to the fight when you're hardest hit - It's when things seem worst that you mustn't quit." In our darkest hour it's hard to see the end of our circumstance. All we can think of is our conditions worsening. But it's usually at this time that our greatest growth can occur if we'll see the moment as a growth opportunity. If we'll see it as a time to learn how to control our thoughts toward an ideal that we cherish.

One thing I share with people who seek my advice when they think their life has come apart, is to help them understand the power that even the tiniest of actions can have when taken in a negative situation. Remember in Science class when we learned that "a body at rest tends to remain at rest or a body in motion tends to remain in motion." This is especially true when overcoming circumstances because "paralysis" usually keeps us in the condition longer than we'd like.

But even more important, is that once we've started in motion, even though it may not seem like much, know this - it's now only a matter of time before you're out, totally out, of the situation that has got you down today.

My long-time favorite poem by an anonymous author is worth remembering today:

When things go wrong as they sometimes will,
When the road you're trudging seems all uphill.
When the funds are low and the debts are high,
And you want to smile, but you have to sigh.
When care is pressing you down a bit,
Rest if you must, but don't you quit.

Life is queer with its twists and turns,
As everyone of us sometimes learns.
And many a fellow turns about,
When he might have won had he stuck it out.
Don't give up though the pace seems slow,
You may succeed with another blow.

Often the goal is nearer than
It seems to a faint and faltering man.
Often the struggler has given up,
When he might have captured the victor’s cup.
And he learned too late when the night came down,
How close he was to the golden crown.

Success is failure turned inside out,
The silver tint of the clouds of doubt.
And you never can tell how close you are,
It may be near when it seems afar.
So stick to the fight when you're hardest hit,
It's when things seem worst that you mustn’t quit.

For those of you interested in motivational and psychological information in both written and audio form Vic Johnson's site has a plethora of wonderful stuff, just click on his name above.
Market & Sector Review
HAVE WE SEEN THE TOP?

Let me preface this topic with an old market cliché I harp on quite often: "It is not a Stock Market - It is a Market of Stocks". The reason I bring this up is that even with the recent declines in the averages and with all the bearish sentiment out there, one stock I continue to hold, on Friday, made another new all time high. Please do not read that as bragging, it is not, it just allows me to illustrate the validity of the above mentioned cliché and to hopefully get everyone to analyze their individual holdings on their own merits and not to sell xyz solely because you believe the S&P or the NDX has made a top. Or to put it in the words of the inimitable Jesse Livermore: "And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I've known many men who were right at exactly the right time, and began buying and selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance." Reminiscences of a Stock Operator, Illustrated Edition Brilliant isn't it and written in 1923! Now on to the market averages.

First let's take a quick look at volatility which has picked up recently. I think the following recent excerpt from Larry Katz Marketsummary and Forecast newsletter expresses it well: "In January we have seen three separate price swings with the third one still in progress. Over this time, in a little under four weeks the S&P has traveled nearly 9% from trough to peak to trough to last Friday (2/3). This is almost 75% of its total price gains seen in 2004 and 2005. We know this is not a completely valid comparison it really does not compare apples to apples in the traditional sense. However, it does make the point, and an important one at that, that we are seeing something these past few weeks which we have not seen in a good while, and that is a big increase in price swings in a concentrated period of time. And here is where we get to the important point of all this. Increased price swings after a prolonged move in either direction historically has been an indication of a pending change in trend. The bigger the preceding move and the higher the volume the more important that potential change in trend is apt to be."

Very often at important market turning points there is always a hook to keep the majority thinking the previous trend will continue. That hook this time may just be the advance/decline line on the NYSE. One reason for the popularity of the advance decline line is the writings of Richard Russell (Dow Theory Letters) and Joseph Granville (Granville Market Letter) in the early 1960's used the divergence in this indicator to predict the market top in 1961 just ahead of a 27% decline in the Dow Jones Industrial Average. In addition the advance/decline line peaked in 1998 2+ years ahead of the market highs in 2000.

With the introduction of decimalization and the proliferation of non-operating issues, one has to wonder if the advance/decline line has any validity at all any more. Over the years I have come to rely more on the McClellan Oscillator and Summation Index as a better measure of overall breadth and momentum. If you need a refresher on the McClellan indicators here is a great explanation courtesy of decisionpoint.com McClellan pay particular attention to the ratio adjusted models.

Notice how the New York Stock Exchange Index as well as the advance/decline line appear to be in concert and in nice rising channels. However, now note the action of the Ratio Adjusted McClellan Summation Index and how it made it's high June of '03 marking the internal momentum high of this advance. Since then there have been a series of lower highs on each advance to new highs in the index. Also note that the summation index made it's low in May of 2004 which utilizing the same logic marked the internal momentum low of this cyclical bull market. Since then we have made a series of lower highs and lower lows both extremes holding for now.

Notice now the action of the ratio adjusted summation index on the NASDAQ COMPOSITE a very similar although not identical picture.

Let's now take a look at another form of participation in this cyclical bull market, the % of stocks trading above their respective 200 and 40 day moving averages. On the first chart notice the high point, very late in 2003. On the second chart notice how every time 80% of stocks are trading above their respective 40 day moving average at least a decent correction has occurred and we crossed that level in early January.

While all this appears to be and in a sense is negative and gives the appearance that perhaps the market visa vie the major averages may be acting irrational in the face of what is apparent here, keep in mind that the market can remain irrational for much longer than any of us can remain solvent so don't attempt to fight the tape based on what you read here or anywhere else. Now let's take a quick look ath the S&P chart and see just how negative it looks or does not look.

All this being said as many of you know I am a big fan of psycholgy and the psychology of the marketplace. Often the minds of the masses are tough to read however from the messages I read during the day and the people I talk to it seems to me there are just too many willing short sellers at this stage and wouldn't it be just amazing if all these short sellers actually were able to short so relatively close to or at the top. There are many ways that traders attempt to measure the prevailing sentiment in the marketplace, one that seems to be gaining increased acceptance is the Rydex funds ratios, as these are traders expressing there opinions with there money.

Chart Courtesy of Mark Young: Equity Guardian Group

I totally agree with Mark's comments on the above chart so bottom line is we should see a rally here the extent of which is as yet unknown, at least to me. I still think we will see a 4-year cycle low in the fall, perhaps 1st quater of '07, the odds in my humble opinion do not favor short selling (basis the major averages just yet), for me the risk/reward is just not there. It is distinctly possible that the rally I expect here could eventually take the markets to new highs. If pressed I would have to make an educated guess that this high point or reversal point if you will is a few weeks to perhaps two months away.
Largest Changes This Week

This Week's Economic Reports

Have A Great Week!

Bill

Disclaimer: Trading in securities, of any type, may not be suitable for all individuals. The contents of this newsletter are not a solicitation to buy or sell securities. The opinions expressed are solely that of the author. You must do your own research, contact your own financial advisor for suitability of any investments. Data gathered is from sources believed to be reliable, but NO guarantee as to their accuracy is made.