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Thursday, August 10, 2006 | Chris Rowe

If you want to have a crystal clear perspective on the market, giving you the edge that most traders don’t have, then you have come to the right place.

 

Sick of hearing media and newsletter services talking about the same friggin’ thing all the time? Me too! So I won’t talk about the Fed today since I’m sure that you’re burnt out on that topic by now.

 

Okay, maybe just this one sentence, and then I will give you some cheat notes: One big and common mistake is to trade around what the Fed is doing or what you think the Fed is going to do.

Don’t be like “everyone else” unless you like losing money. Are you a sheep with the herd mentality? If you are, I just want to thank you for making me rich. (Uh oh, here comes the hate mail again.)

Listen, although I’m known as the Tycoon Report editor who often gives you tips on how to use option strategies to play the current market, I’m not going to give that to you today.

 

But - I’m going to give you something today that’s even better, which might just add a few bucks to your net worth, or save you from making certain mistakes in the near future.

 

I’m going to paste below part of the Weekly Commentary that I sent to members of The Trend Rider a little over two weeks ago that contains some very important information that every Tycoon Report Reader MUST be aware of. This will hopefully give you a view on the market that nobody else is giving you. Enjoy:

(Written July 25, 2006 but still applies today.)

Energy, which paced way higher Monday should be trading to the upside throughout the summer. This would be one weight on the general markets, though.

Commodities in general still have long legs! The booming economies still need all the industrial equipment, metals and energy resources that they can get their hands on.

Also, notice that this market seems to bump higher not because the general feeling of the market is a strong one; instead, it just spikes on good news that happens to surface at the time, like a couple of good earnings announcements, or mergers, or leverage buyouts.

You are basically seeing a mixture of short-covering (bears taking large profits in this case) and bargain hunting, but not a widespread feeling of comfort and bullishness. Don't forget that.

More importantly, you should know that while the "Dow Jones is now above 11,000 again" as the media has highlighted (of course,) the fact of the matter is that each time the major indices have rallied, the real picture shows us that over all, fewer and fewer stocks have been participating in each rally to each new high.

This is easy to see when you look at a NYSE Bullish Percent chart, something that Teeka Tiwari first showed me over a decade ago after I asked him how he would predict market movements so accurately.

Of the stocks on the NYSE, there are more new sell signals being given than there are new buy signals.

After the 2002-2003 market bottom, the market ran straight up to its first top in March of 2004.

Look at the four-year chart of the New York Stock Exchange stocks. Notice that after that first March 2004 top, there were three rallies, each making higher tops, and three sell-offs, each showing higher bottoms.

You would think that this is a bullish sign since it appears as the majority of stocks in the market are being pushed higher and higher.

DON'T BELIEVE IT. It's an illusion! At least be aware of it, and don't fall for the bull shtuff that the media is feeding you.

You should continue to play both sides of the market with me. I'll give you the bull and bear case that I can see, both of which are very considerable.

The bear case is based on an extremely accurate indicator that I have mentioned in the past: the "NYSE Bullish Percent" chart.

The bull case is based on one of the most repetitive and reliable guides in existence called "his-to-ry."

Closer Term Bear Case: The NYSE bullish percent chart gives us an accurate picture of the supply/demand relationship for the market as a whole. The chart posts readings, on a percentage basis, of the number of stocks that are actually on point and figure buy signals.

For example, as Investors Intelligence explains: if there were 2000 stocks in the NYSE index and 1000 of them were on bull signals, then the Bullish percent would be reading 50%.

Since topping out in 2004, this chart shows us that in each rally attempt (which looks, to the average investor, like HIGHER highs,) there are actually fewer and fewer stocks participating in each rally. In other words, in each "major rally" that we have seen since 2004, the NYSE Bullish percent chart has shown us LOWER highs each time. And for the first time since the end of 2002, the NYSE Bullish percent has shown us lower lows. 

In 2004 the NYSE had 86% of its stocks on bull signals. When the general markets showed the next HIGHER top in 2004, we hit 78%. At the next HIGHER top in March of 2005 for the NYSE, we only hit 76%. The recent high in April/May of this year, we only hit 66%. And today we are at 50%.

So while we may be looking at historically low PE ratios on the S&P500 right now, just remember that the breadth of the market, over all, has gotten weaker and weaker over the last 2 years.

Generally you want to see a real “wash out” level on the Bullish Percent chart which is under 30%, to indicate a market bottom (Similar to what you saw in the NYSE Bullish Percent chart in 2002-2003.) But we aren’t even close to that currently.

Don't sell all of your stocks yet, though. Remember, the NYSE bullish percent chart shows short-term rallies to the upside just like the major indices.

As Jesse Livermore said: "I don't hold my allegiance to the bull side or the bear side." We will continue to play both sides of the market.

Now for the “post-sell-off/bull market” argument which is based on that thing that we call "history" (and that is NOT to say that historically speaking, the NYSE Bullish percent chart is not a very accurate indicator.)

In the "Stock Traders Almanac" there is an article titled "Why a 50% gain in the Dow is possible from its 2006 low to its 2007 high."

It shows that "since 1914, the Dow has gained 50% on average from its midterm election year low to its subsequent high in the following pre-election year." That’s right; I said 50% move in one year ON AVERAGE!

"Conversely, since 1913 the Dow has dropped 22.2% on average from its post-election-year high to its subsequent low in the following mid-term year."

The Dow's 2005 post-election year high was 10,959.

A 22% decline would put the Dow at 8526.6 and a subsequent 50% rally would put the Dow at 12,789.9.

So why do I call this a "bull argument"? This is something to keep in your back pocket. Sure, we could see the market sell off from these levels. In fact, this seasonality is likely to show its face in the coming months when we usually see an August or September sell-off.

 

Both of these arguments together actually make sense. Bullish percent charts, high energy costs, inflation, seasonality, or whatever else you want to throw into it all point to a sell-off, near-term. The historical argument related to mid-term election years having down markets, which tend to set up for a big rally in the following year, which is obviously based on statistical fact, supports the theory of an explosive market, post-selloff.

 

Just remember this heads up that I'm bringing to your attention. As the Stock Traders Almanac puts it: "Whatever the level, the rally off the 2006 midterm low will likely provide one of the best buying opportunities of the 21st century."

My advice, as many of you already know, is "don't try to time the market. It's a sucker’s game." Play both sides, and “ride the trend.”

“Profit from the Trend”

Chris Rowe
Chief Investment Officer
The Trend Rider