There is an old saying in the car racing crowd that has found its way into the American lexicon. It goes like this: "When all is said and done, it's only really over when the rubber hits the road!" The last part of that saying was used some years ago in a highly successful TV ad, and since then it has come to mean that after all the hyperbole, what counts is doing it, whatever "it" might be.
For an Olympic runner, it's the race that comes after years of training. All the training was necessary, but when the starter's gun goes off, all that counts is getting to the finish line first. This week, we are in that race to the finish line. The gun has gone off, the crowd is roaring and now the question is who will get to the tape first.
All this is leading up to what I said last week. This week the markets dug in for a real, true battle for supremacy. For the bulls and the bears the rubber has hit the road, so to speak. I told you that I would include my Super Chart this week because the "big cats" were back after the holidays and we needed several days to see the color of their eyes.
Well, their eyes are bloodshot and their Cheshire smile is gone. And that demeanor has us at a point we have not visited since June 2003. We have actually touched my Super Chart Keyline! Now, unless we can close above about S&P cash index 1410 or so by tomorrow night (Friday, Jan. 11) at the 4 p.m. closing bell on the NYSE, we will finish below my Keyline for the first time since November 17, 2000. That's a long, long time ago, folks!
Now, let me explain the rules of the Super Chart before I go on. The Super Chart must close below the Keyline for six consecutive weeks before an actual Major Market Turnaround — MMT — is signaled. So, while we have crossed below the Keyline at 1410 or so, we still must close below it to have week one of six on the books.
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Now, why is the Keyline so important? My Keyline is the amalgamation of a number of factors, mostly statistical, but including several internal "scale" numbers, as well. These inputs are designed to reflect data from such traditional signals as the Dow Theory, the famous signal followed by Richard Russell for over 50 years, the Wilshire 5000 formula, which includes nearly all the major stocks traded on exchanges in the U.S., and some minor input from the bond market.
All these put together have signaled only 16 Major Market Turnarounds since 1965. Its record for gains is phenomenal and its limiting of losses is equally incredible. I have only adjusted it once in all that time and that occurred in 1987's crash when I established a 5 percent stop loss rule for all short positions. That rule has not had to be used since it was established in early 1988, however.
I have placed the Super Chart below for those of you that are chart nuts like me. You will find it quite self-explanatory. The major feature, as always, is the big red line I call my Keyline. And you will note that it is not a chart of the Dow, but of the broader market S&P 500 cash index.
I want to call your attention to one feature of the chart that, as of today, is of great interest to me. Note that lower portion of the chart includes a much smaller chart, also. This section of the Super Chart is the momentum portion of the chart. It measures the "head of steam," so to speak, of the market. The yellow line is reading 27 today before trading started. The red line reads 60. These two lines are also amalgamations of several major momentum indicators, plus three of my own statistical inputs.
The information this chart is giving me right now it that the yellow "faster" line has quickly reaching an "oversold" condition. However, the "slower" red line is still well above the 40-50 area, which is a critical momentum support area when the yellow line is under the 50 level. What this says is plain English is that the sell-off has NOT been as broad as the other market indicators seem to say. If it had, the red line would be much lower.
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Typically, this sort of "low yellow, high red" condition means that there is a rally due in the not very distant future. It does not say how far the rally will carry or if it will resume the major bull market we have been experiencing since June 2003.
But, should the rally occur, it does say that if the two lines both move above the 80 mark in the rally and we are still significantly below the last major highs, then a sell-off could ensue that would be very significant. However, it looks it might be 4-6 weeks in the future before we will know the outcome from such a rally move.
So, what is the bottom line to all this? The investors of the world — and make no mistake about it, the S&P 500 cash index on the Super Chart reflects the mood of the vast majority of the world's important investors — are worried, but NOT enough to sell the longer-term foundation portions of their portfolios, only lightening up on the shorter-term holdings.
For you, this means that you might want to do one of two things: (1) if you are a bit nervous yourself, you might get some S&P 500 LEAPS puts to help protect your portfolio value, or (2) you might just sit tight until my Super Chart finishes it full six-week cycle and then get 80 percent or better into cash and long-term puts.
Granted the expenditure for puts, in the first instance, will be more like insurance if the market continues its bullish mode. But, if it does fall in a big way later in 2008 (my estimate of that event is only 1 in 4 chances at this point), you will make money on the puts and be able to clear out most of the portfolio to cash for the longer-term bear market that would be developing at that point. But remember, that until we finish six weeks, a bear market is still only a lot of speculation. For now, just the puts are the best move.
Looking at the other markets since the return from holidays, it is clear that the bond market investors are looking for much lower interest rates. Currently, they speculate that the Fed will lower rates to about the 3 percent mark.
[Editor's Note: Why the Fed Interest Rate Cuts Won`t Work]
My own feeling on that prediction is that they are still seeing Mr. Greenspan sitting in the office now occupied by Dr. Bernanke. That is a big mistake, for I expect that Dr. Ben will be very slow to lower rates. His philosophy, clearly written in his book published in 2000, says he will use money supply to both perk up the market and control inflation. How? Read his book! It is fascinating!
As I see it, the markets have a lesson to learn from Dr. Bernanke. It is simply this. Interest rates are like using a baseball bat to kill mosquitoes — very destructive and you kill very few mosquitoes. Instead, Dr, Ben will flood the market with liquidity. His exact words this week were, "for as long as needed". And he will use the Fed's power to pinpoint how that money is used, thus targeting controls over inflation in a way not seen before in any financial market.
But, that is a story for another column. For now, expect a lot of criticism of the Fed by all sorts of analysts and commentators claiming the Fed is being "too slow" to lower rates. The lesson to be learned here by all is that Dr. Bernanke will not be using interest rates to get the job done. Hopefully, the lesson will sink in that this is a new day and that the old ways that ran us into recession and boom cycles have been left behind.
Lastly, the other big player out there is gold. Gold set new all-time highs last week and from my study we still have a long way to go — $2,000 an ounce to be exact is my eventual goal. When? Well, there is the rub. A chart can always tell you how high, but it never can tell you when. Sad, but true.
So, my only advice is to buy and wait. I think you will be well rewarded. One last thought on gold. Don't invest more than 15-20 percent of your portfolio max in this yellow stuff. Moderation is best here.
Well, that is about it for this week. It has been a real barnburner, though! These fascinating days only come every three to four years, so it ought to be a real nail biter over the next three to four weeks. And next week, I think I may tell you about another fascinating story going on in the market at the moment — the PPT story. Stay tuned!
For now, do hope your coming investing week is a good one. Meantime, you keep in touch. I do! See you next week.
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