|
Growth Stock Timeliness - Tuesday - Untimely (Weakness during
much of Tuesday's session with a close less than 1% up is a
"hit!." Some judgement is involved.)
- Very Short Term (2-3 Days) - Untimely (Dramatic rise in
complacency the past three months.)
- Short Term (2-3 Weeks) - Untimely (Very moderate intermediate
term cycle low on March 12, but there's been a dramatic rise in
complacency since NDX broke it's trend of declining peaks about
eleven weeks ago (established an intermediate term uptrend).)
Next Session Accuracy/Usefulness Rating - NASDAQ - 106.5 out of
130. 81.92% ("Hit!" NDX in positive territory on Monday and
closed much higher.)
- Gold Stocks - 46 out of 60. 76.67% ("Miss." XAU in negative
territory during all of Monday's session and closed
significantly lower. This for now will only be a test of XAU
implied volatility mechanically interpreted (no judgement) since
I usually get the data a day late (I will probably augment this
system with two more implied volatility indicators (real time
data) similar to how I time the major averages.).
The NASDAQ Composite (COMPX) opened significantly higher at
1685.41 on Monday, and, thanks to the market's (NDX, QQQ, and
OEX) rise in fear on Thursday, a strong US Dollar, and very firm
non US stock markets prior to Monday's trading, COMPX spent the
entire session in positive territory and closed much higher at
1720.71, +57.25 (+3.44%).
The "likely" NDX (NASDAQ 100) intermediate term cycle high of
1265.69 on June 6 was taken out on Monday July 7 with a new high
for this intermediate term cycle of 1282.31. I firmly believe
this is a liquidity bubble similar to March 2000. The P/E
(price/earnings ratio) of the S & P 500 stands at about 36 now
versus 32 in March 2000. If the economy was recovering why did
the Fed recently switch to a weak economy bias and remain on
that bias after cutting rates by 25 basis points on June 25.
Many of the recent reports revealed weaker than expected job
creation and manufacturing sector growth. Q1 GDP growth was
revised down to a 1.4% growth rate. Just as liquidity caused a
dramatic bubble in early 2000 the same phenomenon is occurring
now and will probably be followed by a similar dramatic decline
in the major averages and in economic activity.
The NASDAQ wall of worry (VXN (NASDAQ 100 Volatility Index) and
QQV (QQQ Volatility Index)) grew dramatically on Monday with VXN
revealing that an unusual rise in fear occurred for NDX (NASDAQ
100) and QQV revealed that an unusual rise in fear occurred for
QQQ (NASDAQ 100 Tracking Stock). The NASDAQ is deemed untimely
on Tuesday. Better than expected economic data may result in
strength. Williams %R is in the sell area now (above -20 (near
the top) on my chart is the (look to) "sell" area).
An unusual rise in fear occurred for the NASDAQ 100 on Monday,
with VXN (NASDAQ 100 Volatility Index) rising +1.04 (+3.20%) to
33.51 despite NDX (NASDAQ 100) rising +50.55 (+4.11%) to 1281.89
which reveals that an unusual rise in fear occurred for NDX
because VXN rose very sharply in percentage terms as did NDX (NDX
wall of worry grew dramatically) which portends weakness in NDX
on Tuesday.
An unusual rise in fear occurred for QQQ (NASDAQ 100 Tracking
Stock, +1.31 (+4.28%) to 31.89) on Monday since QQQ rose very
sharply in percentage terms as did QQV (QQQ Volatility Index,
+1.50 (+5.44%) to 29.08) (QQQ wall of worry grew dramatically)
which portends weakness in QQQ on Tuesday.
On Monday VIX rose (+0.44 (+2.04%) to 22.05) despite a rise in
OEX of +9.42 (+1.90%) to 505.50 which was a very sharp rise in
fear for the S & P 100/value stocks (OEX is about 75% value
stocks) since the wall of worry (VIX) rose sharply in percentage
terms despite OEX (S & P 100) rising significantly which
normally portends strength in OEX on Tuesday but the unusual
rise in fear that occurred for NDX and QQQ will probably result
in weakness. The S & P 100 is deemed untimely on Tuesday but
better than expected economic data may result in strength.
Williams %R is in the sell area now (above -20 (near the top) on
my chart is the (look to) "sell" area).
The CBOE Put/Call Ratio at a moderate level (at or above 0.50
but below 0.75) of 0.71 at Monday's close suggests there will be
strength early on Tuesday because it's a reliable non-contrarian
indicator of the next session's early action except at extremely
high (at or above 1.05) or extremely low levels (at or below
0.50) where it sometimes is also a contrarian indicator
(sometimes portends early substantial strength (below 0.50) or a
sharp rally following early potentially severe weakness (at or
above 1.05), judgement is involved).
The NASDAQ TRIN closed at a bullish level of 0.49 (much more
activity in rising issues) on Monday which is positive
technically but the fact that the NASDAQ TRIN was in or near
overbought territory (below 0.35) for much of the session is a
negative. A level between 0.35 and 0.80 is a bullish range for
the NASDAQ TRIN because it indicates much more activity in
rising issues. A NASDAQ TRIN above 1.00 indicates more activity
in declining issues. A NASDAQ TRIN between 1.20 and 1.50 is a
clearly bearish "red zone" range because it indicates much more
activity in declining issues but not a very oversold condition.
If the NASDAQ TRIN rises above 1.50 you can begin to look for a
rally and if it rises above 2.00 that tends to be a reliable
short term buy signal (very oversold condition).
Investor's Intelligence survey of advisor sentiment is at 58.6%
bullish and 16% bearish as of June 11 which is the fewest %
Bears since 1987 (scary). Also, 58.6% bullish is a very high
level of bullishness for Investor's Intelligence which is a
major warning sign and occurred only two days after an
intermediate term sell signal occurred for the NASDAQ. The
"advisors" became even more bullish (above 60%) on June 18 and
were above 59% bullish on June 25.
Looking at NASDAQ 100 (NDX) Chicago Mercantile Exchange
Commitments of Traders in all Futures Combined and Indicated
Futures (Reportable Positions as of July 1, 2003), the
speculators (hedge funds and other speculators/traders) added 64
long contracts and covered/bought back 70 short contracts which
portends weakness (modestly bullish bias with speculators being
contrarian indicators) whereas the commercial traders sold 118
long contracts and added 840 short contracts which portends
weakness (non contrarian indicators (know what they're doing)).
In the past two months the insider sell/buy ratio (another
primary fundamental indicator) more than quadrupled:
MAY $ Value Sells = $7,373,062,001 $ Value Buys = $357,955,496
Sell / Buy = 20.60
APRIL $2,656,070,973 $247,416,809 10.74
MARCH $2,596,777,616 $577,142,734 4.50
It amazes me that few so called experts in the field rarely seem
to use primary fundamental indicators such as the above to
discern what's going on.
American Association of Individual Investors (AAII) % bullish (AAII
has been a useful non-contrarian sentiment indicator at
extremely low levels below 40% bullish and extremely high levels
above 60% bullish.) @ 41.2% bullish is a negative factor for the
prospects of stocks during the week ending 7-11 because it's
near a very low level of bullishness.
On Monday July 7 HUI/XAU broke through their short term uptrend
lines (the bottom line of their short term uptrending channels)
and, thanks to favorable gold/silver COTs (released a day late
due to the holiday) as discussed later, bounced off the bottom
of their parabolic intermediate term channels late in the
session. The fact that they're not far from the bottom of their
parabolic intermediate term channels and the COTs were favorable
indicates that strength is likely on Tuesday.
It appears to be a great time to buy gold stocks for the next
leg up. There was strong institutional buying during the week
ending June 27, the week ending July 3, and on Monday after
little buying interest on Thursday and Friday of the week ending
June 20. HUI/XAU broke out and rallied to the top of their
parabolic intermediate term channels during the week ending June
20, "bounced off," and tested support at the bottom of their
intermediate term channels on Tuesday and Thursday of the week
ending June 27.
On Tuesday June 17 long awaited major breakouts occurred for HUI/XAU
(HUI slicing 155 and XAU breaking out of it's year long
triangle) paving the way for dramatic gains in the next month or
two. I'll put more thought into reasonable targets for those
indices but 185-200 for HUI and 112.23 (a Fibonacci level I got
from someone I have faith in) for the XAU are reasonable targets
for now. However, these targets are best for short term
trading/intermediate term cycle high swag with the next
paragraph discussing when an intermediate term sell signal
occurs.
One should have a chart of both indices with the parabolic
intermediate term channels drawn (basically connect the highs
and lows (from early in the cycle) since March 13, maintain the
width from early in the cycle and use the parabolic shape of the
upcycle to create the parabolic channel/trend). Once a parabolic
intermediate term channel is broken decisively to the downside
for either index a cycle high has probably occurred and it's
time to sell. An intermediate term sell signal occurs when the
parabolic intermediate term channel breaks down.
Gold stocks can shoot up now (next few weeks/months) because
they're not as constrained by the top of HUI/XAU's parabolic
intermediate term channels whose curves have gotten steeper
(much less constraining).
On Thursday there was a significant rise in gold stock fear
since XAU (Philadelphia Gold and Silver Index) IV (Implied
Volatility) Index composite (XAU wall of worry) rose 1.82% to
30.26% (from 29.72% on Wednesday: +0.54%/29.72% x 100%) versus
the XAU falling 1.10% that incorrectly portended strength on
Monday (XAU in negative territory on Monday and closed
significantly lower at 78.84, -0.97, -1.22%.) because (the XAU
wall of worry grew) XAU implied volatility rose significantly
more in percentage terms than the XAU fell.
However, CBOE Gold Index (GOX) IV (Implied Volatility) Index
composite (GOX wall of worry) fell significantly versus a
significant decline in the GOX which was a sharp rise in
complacency that correctly portended weakness in gold stocks on
Monday.
On Wednesday there was a very sharp rise in gold stock
complacency since XAU (Philadelphia Gold and Silver Index) IV
(Implied Volatility) Index composite (XAU wall of worry) fell
4.16% to 29.72% (from 31.01% on Tuesday: -1.29%/31.01% x 100%)
versus the XAU falling 0.46% that correctly portended weakness
on Thursday (XAU in negative territory during most of the
session and closed significantly lower at 79.81, -0.89, -1.10%.)
because (the XAU wall of worry shrank) XAU implied volatility
fell very sharply despite the XAU falling modestly.
The XAU Put/Call Ratio for the July 18 expiration is at 0.519 on
Monday from 0.524 on Thursday (0.534 on Wednesday, 0.527 on
Tuesday July 1, 0.601 on Monday June 30, 0.656 on Friday June
27, 0.600 on Thursday June 26, 0.617 on Wednesday June 25, 0.570
on Tuesday June 24, 0.581 on Monday June 23, 0.379 on Friday
June 20) which portends weakness on Tuesday because it fell
significantly in percentage terms versus a significant decline
in the XAU which is a sharp rise in complacency for the XAU
(this indicator is generally a contrarian indicator except
(sometimes) when an unusual rise in fear (such as on Monday June
23) or complacency occurs it can be a non contrarian indicator).
The sharp rise to 0.617 on Wednesday June 25 did accurately
portend strength on Thursday June 26 because in the face of
significant metal weakness (Gold August 2003 (COMEX) down $5.40
to $344.20) the XAU managed to rally from significant early
weakness to eke out a slight gain on Thursday June 26.
Friday June 20's very low level (very high level of complacency)
correctly portended weakness on Monday June 23. The dramatic
rise in the XAU Put/Call Ratio on Monday June 23 was an unusual
rise in fear that portended weakness on Tuesday June 24.
As I say below the XAU Put/Call Ratio appears to be acting as a
contrarian indicator BUT an unusual rise in fear with a
contrarian indicator usually portends weakness (non contrarian
case for contrarian indicators) and an unusual rise in
complacency portends strength though I don't do anything
mechanically in my work/system. One should always use all
relevant indicators, tools, info, technical condition,
channels/trends, wether the intermediate term cycle is heading
up or down, fundamental factors such as expected weak economic
data, etc. At times "keen analytical judgement" is involved.
I need to observe this indicator for a while to establish/see if
it's contrarian or non contrarian. The XAU Put/Call Ratio was at
0.55 on Friday May 30 and rose to 0.61 by Wednesday June 4 which
portended major strength on Thursday June 5. The decline to 0.60
on Friday June 6 portended weakness on Monday June 9 with HUI/XAU
modestly lower. It appears likely that the XAU Put/Call Ratio is
a contrarian indicator but I still need to gather a bit more
data to establish a statistically meaningful sample size/get a
warm feeling for the indicator.
HUI (AMEX Gold Bugs Index) stochastics and RSI are on a buy
signal now. MACD (below it's moving average) and ROC are on a
sell signal to be ignored. HUI is on a short term buy signal.
As long as HUI remains in it's intermediate term uptrending
parabolic shaped channel it's technical condition is positive
(intermediate term buy signal/uptrend).
The very high HUI volatility on Friday 3-28 is characteristic of
bottoming activity and exceeded that of the intermediate term
cycle low that occurred on October 10, 2002.
For gold bugs the fact that June 6's NDX high (1265.69) isn't a
cycle high for this intermediate term cycle (began March 13) is
interesting because it probably means the gold stocks will rally
another month or two since during the prior three intermediate
term cycles gold stocks rallied for a month or two (even longer
in one case) after an intermediate term cycle high occurred for
the major averages as I discuss in more detail later.
Newmont Mining (NEM), probably the leading gold stock and a lead
indicator for the group, broke out of it's giant triangle
pattern (going back almost exactly 1 year at the time of the
breakout) recently.
NEM's major long term breakout is a major positive for gold
stocks (was a reliable leading indicator that the XAU would
"slice" it's giant triangle to the upside).
Silver is "locked" in a giant triangle pattern (past year or so)
and should break out to the upside in the near future which
means that silver stocks are worth a good look right now. Hecla
Mining (HL) which I own and Pan American Silver (PAAS) which
Bill Gates owns (last I heard) are two good silver stocks
(perform your own due diligence) though Hecla is really about a
50/50 gold/silver mix now.
Intermediate term cycles tend to follow parabolic patterns, so
the breakouts for HUI/XAU above their uptrending intermediate
term channels recently wasn't surprising. Interestingly, both
HUI/XAU have now formed parabolic shaped intermediate term
channels (connect the highs and lows from early in the cycle
since March 13, maintain the original width from early in the
cycle and use the parabolic shape of the rise to form the
parabolic channel's upper and lower trendlines).
The XAU no longer has to contend with the top of it's giant
triangle formation going back to the late May 2002 intermediate
term cycle high. A major long term breakout occurred on Tuesday
June 17.
In the last three intermediate term cycles gold stocks rallied
for a month or two after the major averages hit an intermediate
term cycle high. There was an intermediate term cycle high for
the major averages in March 2002 and gold stocks exploded until
the end of May 2002. There was an intermediate cycle high for
the major averages in late August 2002 and gold stocks rallied
well into September 2002. There was an intermediate cycle high
for the major averages on December 2, 2002 and gold stocks
didn't peak until January with HUI hitting an intermediate term
cycle high in early January and XAU peaking in mid to late
January.
However, in the intermediate term cycle that began in early
April 2001 the gold stocks hit an intermediate term cycle high
at the same time as the major averages but gold was still in a
long term downtrend (Bear Market) at that time.
Gold experienced an intermediate term cycle low (near the bottom
of it's uptrending price channel) on Monday 4-7 with a session
low of $319.20. Gold fell a bit below the bottom of it's "hidden
channel" on Monday 4-7. In late May gold experienced an
intermediate term cycle high near $375. It appears that
seasonality (linked to gold's cycles) is a major factor for gold
stocks.
Looking at "CFTC Commitment of Traders Combined Futures and
Options" for gold (Reportable Positions as of July 1, 2003), the
speculators (hedge funds and other speculators/traders) sold
6442 long contracts and covered 1053 short contracts whereas the
commercial traders added 4019 long contracts and covered/bought
2764 short contracts. The bearish posture of the speculators is
a positive (contrarian indicator) and the bullish posture of the
commercial traders (non contrarian indicators (know what they're
doing)) is a positive.
Looking at "CFTC Commitment of Traders Combined Futures and
Options" for silver (Reportable Positions as of July 1, 2003),
the speculators (hedge funds and other speculators/traders)
added 88 long contracts and added 358 short contracts whereas
the commercial traders sold 2258 long contracts and
covered/bought back 2037 short contracts. The modestly bearish
posture of the speculators is a positive (contrarian indicator)
and the modestly bearish posture of the commercial traders (non
contrarian indicators (know what they're doing)) is a negative.
For the US Dollar (USD) commercial traders (U.S. DOLLAR INDEX -
NEW YORK COTTON EXCHANGE as of Tuesday June 24, 2003, July 1 was
NA) sold 3938 long futures contracts and added 361 short futures
contracts which portends weakness in the USD (non contrarian
indicators (know what they're doing)) and is a bullish factor
for gold in USD terms. The speculators (hedge funds and other
speculators/traders) added 1183 long futures contracts and
covered/bought back 624 short futures contracts which is bearish
(contrarian indicator) for the USD and a bullish factor for gold
in USD terms.
For the Euro commercial traders (FX - CHICAGO MERCANTILE
EXCHANGE as of June 24, 2003, July 1 was NA) added 2816 long
futures contracts and covered/bought back 4258 short futures
contracts which portends strength in the Euro and strength in
gold in USD terms. The speculators (hedge funds and other
speculators/traders) sold 6074 long futures contracts and
covered/bought back 1421 short futures contracts which portends
strength (contrarian indicator) in the Euro and is bullish for
gold in USD terms.
Keep in mind that the metal lags the gold stocks on a long term
(and apparently intermediate term basis with an intermediate
term cycle high in early February versus the stocks peaking in
January and an intermediate term cycle low on April 7 nearly a
month after the stocks hit an intermediate term cycle low on
March 13) basis. The metal recently had an enormous rally from
the $300/Ounce area to about $388. It played catchup with the
HUI which is a good sign (HUI rose 70-75% in both 2001 and 2002,
outperforming the metal, and began it's Bull Market in late 2000
about 5-6 months before the metal).
A gold stock Bull Market (The New Bull Market!) began in late
2000. I suspect there will be a huge rally in the next few
months (an intermediate term buy signal occured on Friday 3-28
with HUI rising 7.91%) as occurred in 2001 and 2002 this time of
year. Short covering will be a major factor because the gold
stock market is still a relatively small one.
Look for gold to trend higher this year and long term. $330.00,
a major resistance level, was broken on Thursday 12-12-02. There
might be a lot of money to be made in the gold stocks during the
next few weeks but keep in mind they tend to be extremely
volatile as they have been recently. The 50 basis point Fed rate
cut at the November 6 FOMC and the 25 basis point rate cut at
the June 25 FOMC are major positives for gold stocks. The rapid
growth in the money supply is a major positive for the precious
metals. The Fed is in the unenviable position of having to
inflate (decrease the dollar's value) in order to keep the
economy afloat.
Thursday 12-12's major breakout above $330/ounce confirms a
likely long term Bull Market for gold and is a major long term
buy signal.
At late May's intermediate term cycle high gold volatility
became very high which correctly indicated there would be a
major move down. The spike up in volatility accompanied the very
sharp rise to the $375 area and correctly identified an
intermediate term cycle high in gold. It appears that extremely
low volatility marks gold bottoms and extremely high volatility
marks important tops which is the opposite of what happens with
the major averages where extremely low volatility marks tops and
extremely high volatility marks bottoms on both a short and
intermediate term basis (The extreme cycle low on 9-21-01
occurred at an extreme of volatility that saw VXN rise above 91.
A sell signal occurred in March 2002 when VXN fell below 40
because it indicated that an extreme of low volatility was near.
All the major averages (growth and value) began trending lower
at that time though the major NASDAQ averages began trending
lower in early January because growth stocks hit a cycle high at
that time.).
It appears the market may be heading for another short
intermediate term cycle (began on March 12 when VIX hit 40 but
VXN was at a very moderate level of 43) such as began on July
24, 2002 and October 10, 2002 when VIX rose above the extreme
level of 50.00. So, I'll be looking for another important cycle
low when VIX reaches 50+ (and/or if VXN reaches the extreme
level of 80+).
VXN is new as of January 2001 so not enough data exists yet to
be a statistically meaningful sample size but identifying major
deltas in fear (Delta VIX/VXN) and peaks in VIX/VXN can identify
likely cycle highs and lows. The principle of a major rise
(delta) in fear or complacency leading to major rallies/declines
in the major averages is a sound one as is the degree that fear
or complacency creeps into the market as it rallies/declines
(how well the wall of worry holds up) portending strength (when
fear creeps in) or weakness (when complacency creeps in). This
chart of the percentage moves in VIX and VXN versus the S & P
500 (SPX), the Dow (DJIA), and the NASDAQ Composite (COMPX)
illustrates that sound principle of market timing.
Two extremes of fear (VIX hit the extreme level of 50+ on
7-24-02 and 10-10-02 and VXN rose to moderately high levels of
69+ and 64+ respectively on those dates) in 2002 led to
(triggered) intermediate term cycle lows. When VIX and VXN both
exceeded extreme levels (of 50 & 80 respectively) on 9-21-01 (VXN
hit 91+) a healthy long intermediate term (6 month+) cycle
ensued (an extreme intermediate term cycle low/major bottom
occurred).
Value stock volatility (VIX, OEX Volatility Index, is mostly
value stock volatility because the S & P 100 appears to be about
75-80% value stocks. VIX largely reflects value stock
volatility) is running ahead of growth stock volatility as it
did when the July 24, 2002 and October 10, 2002 intermediate
term cycle lows occurred with VIX at a low level (between 20-25)
at 22.05 as of Monday's close and VXN at a very low level (below
40) of implied volatility/fear at 33.51. For VXN to be at a
"high" level of implied volatility/fear it would be at or above
60 which is where it was (at 64+) when the October 10 (the
second "VIX 50.00" moderate cycle low in 2002) intermediate term
cycle began. Growth stocks are much more volatile than value
stocks hence the differing levels for "high" implied volatility,
"very high" implied volatility, etc. for VIX and VXN.
The disparity between growth and value stock implied
volatility/fear is "preventing" an extreme cycle low by
triggering an intermediate term cycle low before NASDAQ/growth
stock implied volatility/fear (VXN/QQV) becomes extreme
(occurred twice in 2002). I think VXN must at least reach 75 and
probably near or above 80 before an extreme cycle low can occur.
It reached 91+ when the last extreme cycle low on 9-21-01
occurred as I've discussed previously. It also spiked above 80
when the April 2001 cycle low occurred. We got another "VIX
50.00 rally" (moderate cycle low) on 10-10-02 and a very
moderate cycle low on March 12 when VIX rose to 40ish but VXN
was only at 43ish.
The moderate intermediate term cycles after the July 24, 2002
cycle low (and after the October 10, 2002 and March 12 cycle
lows) strongly supports my view that VXN must approach or exceed
80 as it has in recent intermediate term cycle lows (growth
stock fear must become extreme) in order for a true extreme
cycle low (major bottom) to occur.
At true extreme cycle lows fear becomes much more extreme than
it did on 7-24-02, 10-10-02, and 3-13-03 (VXN at about 70 on
7-24-02, at 64 on 10-10-02, and at 43 on 3-13-03. Spiked to 91+
at the September 21, 2001 cycle low and well above 80 when the
April 2001 cycle low occurred). Also, complacency doesn't creep
back into the market as quickly as it did during the recent
moderate intermediate term cycles after 7-24-02, 10-10-02, and
3-12-03. In other words, buckle up!
People who mechanically rely on one indicator such as VIX tend
to get into trouble. This is why I look at a variety of primary
indicators such as VXN, QQV, VIX, Advance/Decline Ratio, Up/Down
Volume, total volume, money flow, Investor's Intelligence survey
of advisor bullishness, etc. I would call the July 24 and the
October 10 Bear Market lows moderate intermediate term cycle
lows because VIX reached an extreme level of 50+ but VXN fell
well short of an extreme 80+ (it rose to about 70 on 7-24-02 and
64 on 10-10-02. Spiked to 91+ on 9-21-01).
Intermediate term cycles tend to be 3-12 months in duration in
recent years. There were two intermediate term cycle lows in
2001 (April and September) with September 21, 2001's being a
major bottom (extreme intermediate term cycle low where VIX > 50
and VXN > 91 on 9-21-01).
Since there was an enormous rise in complacency during the
intermediate term upcycle after the March 12 very moderate (VIX
rose to a respectable 40+ but VXN only rose to 43+) intermediate
term cycle low (VIX, VXN, and QQV fell dramatically), the
primary growth stock indicators portend an intermediate term
cycle high in the near future (may have occurred on June 6).
Breadth, a primary fundamental indicator, was very positive on
Monday with NASDAQ A/D at nearly 23:9 in favor of advancing
issues and NASDAQ Up/Down Volume was in favor of up volume by
5:1. When an intermediate term cycle low occurs and a new
upcycle begins breadth should turn convincingly positive during
the early high fear part of the cycle. Growth (NASDAQ is mostly
growth) will be more timely than value (NYSE is mostly value)
but both should rise sharply during the early high fear (VXN >
60, VIX > 30) part of the cycle.
VXN is at 33.51 as of Monday and I expect it to briefly spike
above 80 and possibly even 90 the day an extreme cycle low
(major bottom) occurs. It's likely that will be the only day
that VXN spikes above 80, especially if it rises above 90. The
more extreme fear becomes the more likely a "V" shaped cycle low
occurs as opposed to a "W" shaped retest cycle low occurring
probably as a result of a more moderate peak level of fear. VIX
(OEX/value stock implied volatility) reaching 50+ is another
likely indication that an intermediate term cycle low will occur
(be triggered by an extreme of fear) soon, but is a much less
extreme cycle low than when VXN (growth stock volatility)
reaches 80+.
A great trading opportunity may occur in the next few months.
Keep in mind that from the September 21, 2001 COMPX intermediate
term cycle low of 1387 to the intermediate term cycle high in
early January 2002 of about 2100 COMPX gained about 50% in three
and a half months. So, a very nice gain will probably result if
one buys QQQ near the cycle low and exits once a complacent,
fairly low volatility market arises.
One needs to keep in mind that the sentiment picture can change
drastically in a few hours or even less from what I discussed
using the previous close's sentiment figures. It's important to
look at VXN intraday and compare it to the figure I discuss from
the previous session's close. If fear rises substantially (large
+ Delta VXN) that portends a rally and if complacency jumps
(large - Delta VXN) substantially that portends weakness. An
unexpectedly large jump in fear or complacency can dramatically
change the very short term sentiment picture.
It's important to remember that when capitulation becomes a
major factor that fear/volatility (VXN) can rise dramatically
and though that normally would portend a nice rally, a lag time
arises and one has to wait for the cycle low to go long QQQ once
serious capitulation begins. The steep drop and quick snapback
at NASDAQ cycle lows tends to form a V (a retest of the cycle
low is a possibility also which is a W).
I suspect that the more extreme fear/volatility becomes (VXN
spiking above 90 to 91+ as it did on 9-21-01 when the last
extreme cycle low (major bottom) occurred) the more likely a "V"
will occur and a more moderate peak level of fear/volatility (VXN
failing to reach 80) greatly increases the likelihood of a "W"
pattern (retest and potential double bottom formation) cycle low
occurring.
The low level of implied volatility/fear (as of 6-30-03) has a
high correlation with a low level of volatility. Daily moves in
COMPX on the order of 1%+ aren't surprising. Volatility (VXN)
may rise sharply in the next few sessions because the
intermediate term cycle is probably heading down and implied
volatility (fear) tends to rise as the market falls.
If you buy QQQ at the wrong time you might experience
substantial downside. Buying very near the cycle low takes
nerves of steel and is only for highly skilled traders due to
the extreme volatility. Don't try this at home unless maybe you
are a highly skilled trader or you can live with a great deal of
risk. For neophytes IF you try to trade the gold stocks or QQQ
(or any highly volatile stock) you should only be using a modest
amount of risk capital and should have a risk mitigation
strategy.
Happy trading, may the force be with you,
Joe F. Rocks!
|
