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Just had a funny thought and had to search for this post to check dates and times.


Now if I'm right, this post was started even before the Bombs went off in Spain.



Posted: Thu 11/03/04 08:11am

The market looks to be getting REALLY nervous...

The ASX200 is at a record high (it's following the US markets)
The AUS is weakening against the US (and therefore there is the threat that money will start flowing out of the Australian market back into the US)
I saw WB has been making some noise RE: He thinks the US market has issues.
Metal/mineral prices are dropping (yet another factor against the Australian economy)

Anybody else got any thoughts ?



If I remember correctly, this happen just before 9/11.


May be the security agencies should have one eye on the market.


Any thoughts ?

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Bear Sightings?


March 24, 2004

Admit it. How many of you opened this report because of the word ?Bear? in the title? It is amazing to me that after a -6% decline over the last 3 - 5 weeks (actually it?s been -5.43% on a closing basis for the S&P 500 and -6.55% on an intraday basis) that so many investors are ready to throw in the towel because of the lesson learned from the ?Great Bear of 2000 ? 2003?? (The lesson, of course, was ?gee that was brutal, let?s make a point to never sit through something like that again!?)


Unfortunately, the vast majority of investors (including some professionals I know) are experts at preparing now for what they should have done in the last cycle. Everybody seems to be talking about whether or not we?ve got a new Bear Market on our hands. Everyone appears all too anxious to jump the gun and head for the hills ? because that?s what they should have done at some point in 2000. But let?s remember that in early 2000, no one was talking about a Bear Market.


Let?s remember that as of early 2000, the leadership was very narrow and limited to just one area ? technology. Let?s remember that the momentum had peaked long before the market actually headed down. And let?s remember that the majority of stocks had already experienced a decline before the broad averages finally caved in. In other words, the handwriting was on the wall, but ?everyone? ignored it. Now ?everyone? sees a Bear Market after a correction which is less than 3 weeks old.


Last week we made the case that the current correction is certainly no fun ? but it also is NOT the start of a new Bear Market. Since then, the Dow has given up 300 points, the NASDAQ has made a fresh new low, and perhaps most disconcerting, the leaders (the Russell 2000 and Midcap indices) finally joined in the fun and broke support. While I can argue that the Midcap chart is still technically healthy, it is the sole holdout among the major indices. The rest of the market has turned ugly. So... inquiring minds want to know... have I changed my tune?


To review, we?ve got a market which appears to be in an intermediate term downtrend, it clearly has some downside momentum, it has a lot of bad ?geopolitical? news to deal with, it now has negative returns for the year, and it definitely has a whole bunch of nervous investors. Granted, seeing red in your portfolios is a definite bummer at this point in the year, but? does this make it a Bear Market?



Good News and Bad News


Let?s start with a bit of Bad News. (You Bears out there should stay calm though, it?s not THAT bad!) Probably the most important model we use is our Big Picture Trend & Momentum Model. The model is designed to give an indication of the technical health of the broad market. The model is comprised of more than 100 indicators and looks at the trend and momentum of 104 industry groups. By looking at each industry group individually, we avoid the pitfall of focusing on the capitalization weighted indices such as the S&P 500 (which are dominated by the largest companies), and thus, get a much truer picture of the underlying health of the broad market.

The bad news is that our Big Picture Trend & Momentum Model has downticked from a Positive reading (last week it was at 9.0) to Neutral (although just by a smidge as the current reading is 8.7). Since this is a major component of our management strategy, we turned to the computers at Ned Davis Research to tell us how the market has performed in the past when this model goes from Positive to Neutral.


When the Model?s reading is 8.8 and above, the S&P 500 has historically risen at a rate of +24.5% per year. However, when the model is in the neutral zone (6.5 ? 8.8) the market?s gain per year is cut in half to +12.2% per year. So while the movement from Positive to Neutral is definitely a ?downgrade? to the market?s overall trend and momentum, since the outlook for gains in this zone are still in double digits, we have to continue to rate the environment as moderately positive, or ?constructive.?


However, the gang at NDR are never ones to leave well enough alone. They took the analysis a step further and asked their computers what happens to returns when the model is moving ?up? or ?down? within the zones. What they do is look at the model?s reading and compare it to where it was 9 weeks ago. The bad news is the model was higher 9 weeks ago, so the model?s movement is technically down (although not by much). And when the model?s reading is neutral AND moving down, the gain per year is just +1.5%.


So, it will suffice to say that in the Big Picture, the momentum of the market has to be downgraded. And this, in turn, means that the overall environment must also be downgraded.


What does this mean? Basically, we have to recognize that the upside momentum that the market carried so well into the New Year, has most likely peaked, and thus the Big Picture Trend & Momentum can only be given a mildly positive rating, at best.



Weaker, Yes?


So, yes, momentum is weaker. Yes, things have been ugly lately. Yes, we had a simply awful technical day on Monday with downside volume swamping upside volume by more than 10 to 1. Yes, there are losses on the indexes for the year. Yes, the election could be a problem for the market. Yes, we have to worry about Terrorism again. Yes, the situation in the Middle East is unsettling. Yes, China?s saber rattling makes for nervous trading. Yes, oil prices are high right now. And yes, any acts of terror in the US would stop the economy in its tracks.

Frankly that list makes my head (and stomach) hurt and I too, want to run and hide at times. But, but, but? there are also lots of good things happening (earnings, economy, rates, money supply) and in any given month we can usually make a similar list of worries. The reality is that these are mostly worries at this stage ? and the market is in the process of ?pricing in? the likelihood of any of the above impacting profits. I?m not suggesting we should blindly plow forward and just dismiss this mounting wall of worries. But I do think it?s premature to assume the Kodiak has returned.



?But Still No Bear Sighting


Now for the good news. While we?ve gotten some good arguments from readers lately (keep ?em coming ? it?s always good to have someone poking holes in your position? it makes for a better analysis of other team?s argument), we still have a hard time arguing that this is the start of a new Bear Market.

Why, you ask? As usual, let?s turn back to the unemotional models and see what we?ve got. And since the discussion du jour centers around the question of a Bear Market and the Momentum of the market, let's look back at history and see what we can find. In the last 7 Bear Markets, the momentum of the market actually peaked before prices did ? and then typically fell off of a cliff during the first 5 weeks of the initial Bear decline. To illustrate this let?s look at how the Big Picture Trend & Momentum Model acted at the beginning of the last 7 Bear Markets. The average reading for the model at the last 7 market peaks has been 7.8 (which is a neutral reading). But then it fell precipitously in the following 5 weeks to an average of 5.3 (which is a negative reading). So in the last 7 Bears, the broad market?s momentum took a rather severe dive as the Bear began.


The good news is this is simply not happening right now. The model?s reading at the recent peak in the Dow was 9.1 (a strong reading). Five weeks later, with the Dow off -6.5%, the model has indeed experienced some weakness, but it has only dropped to 8.73. And while this technically is in the ?neutral? zone (by a smidge), it is still a strong reading and nowhere near the 5.3 seen during the beginning of the last 7 bear markets. This tells us that, at least at this point, the ?troops? are still marching in a positive direction.


Couple this with improving levels for our Monetary, Investor Sentiment, and Economic models and the ?weight of the evidence? says there is no Bear to be seen (at least for right now).



The Point


The point to this analysis is a downgrade of the environment doesn?t mean we are in a Bear Market. It also doesn?t even mean the Mini Bull is over. But it does mean that it?s time to shift to a slightly lower risk profile.


What if I?m Wrong?


I am very aware that my stance on this being an annoying, yet "normal" correction could wind up being flat-out wrong. The good news is that I learned a long time ago that the market doesn't care what I think, and thus, we don't manage money based on what we "think" is right or wrong. We manage money based on the reading of our models and the environment. For example, it was a bit frustrating to reduce the exposure in our model portfolios on Tuesday since the market has already declined a good bit. However, time has also taught me that discipline is the key to long term success in the markets.

If my current view is "wrong" as some readers suggest, then this will have been the first of many reductions in exposure - as we keep portfolios "in-line" with the environment. If this does turn out to be a "normal" type of correction of -5% to -10% (the average decline after "extended rallies" has been -9% on the Dow and has lasted 46 days) then we will simply redeploy the cash we raised to buy the "leaders."


I guess my main point is that if I am indeed wrong on the outlook for this correction, I have no intention whatsoever of having it affect my portfolios (both my firm's and the letter's) for a long period of time. So while I may be "talking tough" here, if our models deteriorate further, we will continue to reduce exposure to market risk.


In sum, nothing is ever guaranteed in this business, so I like to let the models be my guide - to help stack the odds in my favor. It may not be the most exciting management method because I won't spend any time crowing about being right, but it has kept me out of trouble and focused on the leaders over the long haul.


In spite of all the red ink, make it a point to enjoy the rest of the week.


David D. Moenning


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There is no doubt that this period is nothing more than a bull market correction. We are only in the second phase of the bull market.


We are still seeing IPO's, increasing earnings and M&A activity. The market has, as usual, got ahead of itself.


I expect, failing another Sept 11, type incident or major natural disaster such as an earthquake destroying Japan, that the ASX 200 will break 4000 over the next 12-18 months, as we enter the 3rd phase of the bull market. Other markets I expect similar performance.




Super is on the agenda big time, top up is the message and where will most of the funds go, equity funds.

Property is getting on the nose, soon the "everyday" investors will be following the latest "hot" thing, stocks!!!


Even the put/call ratio doesn't indicate a major fall is expected, currently sitting comfortably around 0.8.


Sure active traders, may have some cash on the sidelines at this time, but investors would be well versed to top up on quality stocks.


There is a big push of growth coming as the world economy shakes off the funk, yes there may be a systemic collapse due to terror or a disaster, but that risk is always there.


Just MHO





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I really hate to say this but alot of this will do with the elections this year...



Someone was telling me that New Presidents seem to always spark the market (esp when the last one is linked to bad markets)



But should always listen to the tea lady.... its amazing how many leaks can be tracked them

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IN REPLY TO A POST BY s4rx7, Thu 25/03/04 03:32pm

Bear Market? Bull market? who cares. If it is a raging bear market then trade short. Bear markets are good, they scare away the idiots. Anyway, I think we've been in a 100 year bull market, with the dow rising from a low sixty to over ten thousand. Generally, more technology, better productivity and expanding markets and the human race is in a bull market of growth and prosperity. It's only a bear market for idiots who trade long against stocks that are over inflated and stubbornly sit on them, or worse, let funds managers do it for them then complain their savings / super / whatever isn't doing so well. No matter how bearish the market, if you insist on trading long you can find ~something~ that is doing OK, chances are all the other diehard longs will be jumping on those stocks as well.



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Oavde, i hear what your saying, and i agree. But most of the stocks i trade (low cap, OIL/Miners/Biotech), cannot be traded short as far as i know.


It is something i often hear said, short them, but i admit i do not really understand how ?


Can you give some examples how you can play the bear side of the market with these types of stocks, or does one have to move into the top100 to short.


From one boring LONG

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IN REPLY TO A POST BY Barrios, Fri 26/03/04 07:34am

The way to short a stock (that is not shortable) is to trade it defensively.


By placing a bid just below the resistance line, and selling it on ANY rally.

The stock needs to be liquid, so that you can get out with ease.

One example of a dead cat bounce chart is RRS from 16th of Feb 5.8c to todays date 3c.

Or MST from 60c on 29th of August to 41c on 17th of February.


By placing a low bid and selling on any rally, you are effectively betting that the stock will continue to go down..........hence you are shorting the stock, and making money on a downward trending chart.


The same method can be used on an upward trending stock such as AVV the only difference is the timing of your sell, because the trend is upwards to can choose to hold longer and only sell on extreme rallys that are not sustainable short term.



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IN REPLY TO A POST BY texas4qld, Fri 26/03/04 08:15am

Tex, have you considered CFD's to short stock such WOW which i noted you commenting on earlier? I started a thread on this topic over a month ago but received no replies. I think these could be the vehicle to trade if you have a view on a top 20 stock over a shortish period. Perfect for swing trading. Brokerage is $10 and on a margin of $10,000 you can trade $100,000 worth of stock. You can also go long or short the indices. Strategies such as shorting banks and going long resources in pairs trading could be a good strategy. Just a note to raise a comment. Perhaps others have had experience with these. I am a SPI trader and am investigating the benefits of CFD's over futures.



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IN REPLY TO A POST BY Hector, Fri 26/03/04 12:07pm

Cheers Hector, I'm still not experienced in that area, and don't want to tinker with those sort of options until I've done a few courses.

I can't see that happening in the near future, but thanks for the input.



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