Newsletter

July 15, 2006

Whatever Happens, Take Responsibility

Market & Sector Review
Correction or Bear Market?

Largest Changes This Week

This Week's Economic Reports
Whatever Happens, Take Responsibility

A most important attribute of successful people and successful traders share is simply; no matter what happens they take personal responsibility. They operate on the belief that they create their world. The phrase you'll most often hear is, "I am responsible, I'll take care of it."

Most of you, I am sure at one time or another, have purchased a stock based upon the recommendation of a stockbroker, a friend, investment newsletter, or in the modern age a web site or web blog. I am also sure, that like myself, sometimes those ideas do not work out and result in a loss. Most stockbroker's, investment advisors, newsletter and web authors are honest, hardworking individuals. They are merely conveying to you what they honestly believe to be an outstanding investment idea or trade, at least at the time. The one, however, who has the ultimate responsibility is you. You bought into the argument, the idea, the concept; you bear the responsibility, regardless of the results. No one held a gun to your head when you acted. The position you are in, you created, if not by your physical actions, maybe by the level and tenor of your thoughts (fear and greed come to mind).

If you don't believe that you're creating your world, whether it be successes or failures, then you are at the mercy of circumstances. Things just happen to you. You're an object, not a subject. If that is what you believe, its time to look for another culture, another world. Why be here if you're just the product of random outside forces?

Taking responsibility is one of the best measures of a person's maturity. It's also an example of beliefs supporting other beliefs, a coherent system of beliefs. If you take responsibility, you are in control, and if you are in control, you will succeed. "Those who take responsibility are in power. Those who avoid it are disempowered" - Anthony Robbins.

Dan Rather once said John F. Kennedy became a true leader during the Bay of Pigs incident, when he stood before the American people and said that the Bay of Pigs was an atrocity that should never have happened, and then took full responsibility for it. When he did that, he was transformed from an able young politician, to a real leader. He didn't choose to blame circumstances or advisors or anyone but himself.

By retaining responsibility, you retain the power to change the result you produce. The next time you have a bad trade, take personal responsibility for it, and learn from it. Avoid at all costs blame. Remember, it's not a failure, it's a learning experience, it's feedback.
Market & Sector Review
Correction or Bear Market?

As usual I began making notes and putting this newsletter together early in the week. While a good deal of this letter fell into place, I as I am sure most, had no idea just how this weeks market would unfold. Some of the comments below may seem obvious at this point however, they were not that obvious at the time of writing.

Trading the markets is a matter of trading probabilities. Simply stated: due the odds favor your current market outlook or are the odds of success remote. Ninety nine to one shots on ocassion win at the race track, not very often however. As traders we must always ask oursleves, what's the likelyhood? So what is the probability the market is experiencing just a correction versus entering a new bear market? Let's explore!

In the annual forecast issue (available in the Archives section) I discussed the distinct probability, that basis the 4 year cycle, the stock market would likely make a high in the first or second quarter, followed by a potential low in the fourth quarter of 2006 or perhaps early in 2007. For the benefit of newer subscribers, in that issue I referred to a historical study of the four year cycle by Marshall D. Nickles, Ed.D.; Professor of Economics, Graziadio School, Pepperdine University. The professor studied the history and published an academic paper on the presidential cycle in the stock market utilizing data from 1942 through 2002. Below are two of the charts from that study:

Historical Stock Market Cycles for the S&P 500 Index (1942 - 2002)

The table above shows that full cycles occur approximately every four years. Bull Markets averaged about three (3) years while bear markets averaged less than one (1) year. Stock market lows have occurred very close to mid-year congressional elections, or approximately two years before the next presidential election. Now let's take a look at when during presidential cycles the market has previously bottomed:

Presidential Elections and Market Troughs

At the June lows the markets correction looked as such: Dow Industrials - 8%; S&P 500 - 8%; NASDAQ Composite - 13%; NASDAQ 100 - 15%; New York Stock Exchange Composite - 10%. Depending upon your favorite index this is certainly within the confines of a normal 10% correction. Is it a normal correction or the beginning of the bear market? Let's take a look at some other factors that may help you decide.

I am by no stretch of the imagination an expert on the Fed or Monetary policy. However a good general rule to follow is that when monetary policy is undergoing an expansionary phase "bull" markets will certainly follow. Conversely when monetary policy is in contraction, "bear" markets will follow. This should make empirical sense to everyone; the more money there is seeking a home, the more money will flow into the markets as well as other investments. An up tick or a down tick does not a trend make; this particular indicator takes a very long time to take hold.

From the Federal Reserve Bank of St. Louis July 2006 report on Monetary Trends, the following charts (http://research.stlouisfed.org/publications/mt/):

So far we have the four year cycle and the monetary trend both pointing to lower prices ahead. Next we look at sentiment. I often look at sentiment but not as many do; a short term trading tool. My tendency is to look at where bullish sentiment in a bull run peaks and then begins to decline as the cycle matures. Usually sentiment peaks well before any market peak.

Notice in the above chart how bullish sentiment as measured by the green line (bulls) as well as the eight week moving average reached what could be called extreme levels early in 2004. Conventional interpretation - sell, sentiment is too bullish. However, you must look at this in context, the bull market was still young and people were catching on. Throughout the following two years sentiment remained bullish, recording almost consistently better than 2:1 bulls over bears even as high as 4:1 bulls over bears. The eight week moving average however continued to make lower highs and lower lows as investors suspected this Bull Run had no longer had its previous upside potential. There are of course other measures of investor sentiment such as Investors Intelligence Newsletter Opinions:

The latest weekly Investor's Intelligence survey shows a rise in bulls to 42% from 38% and a decline in bearish sentiment to 33% from 34%.

In recent years, perhaps due to CNBC, a bear market has been defined as down 20% from the index of interest's high. I'm not sure who came up with that definition but 20% down is a bit late for me, in fact revisiting the above Peperdine University charts odds begin to favor at this point the bear market could be almost over. Here are two very easy ways to determine the intermediate term direction, the fifty five (55) day EMA as applied to the daily and the weekly charts. Unfortunately since my main computer needs to go in for repairs, the charts are as of Wednesday (7/12) close.

Notice above with the exception of the September/October of 2005 period the 55-day EMA acted as support all the way up. With the exception of that period as we approached or broke through this average for a few days, the market bounced to new highs. After a false sell signal in October (55-day pointing down), in November the markets went through the 55 on increasing volume indicating good strength. Now since the May highs the 55-day EMA has turned negative and we are testing the 55-day EMA for the second time during this downtrend. For those who believe we have seen the highs this 55-day EMA should continue to act as resistance. Should we reproduce the action of last October then perhaps one more trip to the old highs is in order.

And finally from Lowry's (the oldest stock market technical analysis advisory) Lowrys Reports which I saw posted on a message board early this week: "If the current rally is the start of a broad, sustained market advance, then the Buying Power Index should be in a strong uptrend pattern, reaching new rally highs ahead of the major prices indexes, and the Selling Pressure Index should be dropping rapidly. But, that has not been the case. Since the rally attempt began on June 14th, the Selling Pressure Index has moved essentially sideways within a relatively narrow range, indicating that the desire to sell has not been exhausted; rather, sellers seem to have simply held back on selling temporarily, perhaps to take advantage of the rally. At the same time, the Buying Power Index has dropped to new multi-year lows again this week, show that buying interest has been drying up as the rally has proceeded. . . . Rallies occurring in the face of weakening demand are usually short-lived."

I personally believe the bear market to be underway. Bear markets are difficult to navigate for most people, rallies are usually sharp, fast, and do not last very long. The markets job so-to-speak is to keep the majority bullish as long as possible. Remember, howerver: "It is not a stock market - It is a market of stocks". In the Wednesday evening update their were over 50 new five year highs listed perhaps they are a part of your holdings. Looking at one more chart I can come up with a potential bullish spring setup that would lead to a nice summer rally, however my opinion from the 2006 outlook is unchanged and that is looking for the ultimate low between the fourth quarter of this year or the first quarter of next year.

Could it be different this time? Always a possiblity but what are the odds?
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.